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INDIA'S BALANCE OF
INDEBTEDNESS
1898-1913
INDIA'S BALANCE OF
INDEBTEDNESS
1898-1913
by
Y. S. PANDIT, M.A.
With a Foreword by
SIR JEHANGIR COYAJEE
LONDON
GEORGE ALLEN $_ UNWIN LTD
MUSEUM STREET
FIRST PUBLISHED IN IQ37
All rights reserved
PRINTED IN GREAT BRITAIN BY
UNWIN BROTHERS LTD., WOKING
TO
MY MOTHER
PREFACE
THIS inductive study of India's balance of indebtedness during
1898 to 1913 was undertaken at the suggestion of Professor
D. Ghosh Qf the University School of Economics and Sociology,
Bombay. The work has been carried out entirely on the lines
of Professor Jacob Viner's study of Canada. There were a
great many difficulties in applying Viner's methods to Indian
conditions, but I faced them with confidence with the help
of Professor Ghosh, to whom I am greatly indebted for
constant advice and criticism in completing this study.
My debt to Professor Jacob Viner, though indirect, is also
equally great. The influence of his monumental work can be
seen throughout the present study.
I am specially indebted to Sir Jehangir C. Coyajee who,
in spite of his preoccupations, kindly consented to write a
Foreword to this book.
I also acknowledge my indebtedness to the University of
Bombay for the substantial financial help it has granted
towards the cost of the publication of this book.
Y. S. PANDIT
BOMBAY
October 1936
FOREWORD
IN 1924 Jacob Viner an eminent American Professor
published his famous and epoch-making study of Canada!*
Balance of Indebtedness. His lead has been taken up by quite
a number of economists who have tested the validity of the
economic theory of international adjustment from the ex-
perience of their several countries. Mr. Pandit's work forms
an important addition to the growing literature on this branch
of applied Economics. Our author has selected India's ex-
perience during the period 1898-1913 as the subject of his
study. This was a period of increased foreign borrowings by
India and of expanding foreign demand for her products. It
was also the period during which the Gold Exchange Standard
was being gradually introduced into the country. The author
had thus the opportunity of finding out not only whether the
theory of international adjustment is borne out by India's
experience but also of showing to what extent, if any, the
process of adjustment was affected by her peculiar currency
organization. An opportunity was afforded to him of studying
the history of Indian currency from a new point of view.
Such a study as that carried out by Mr. Pandit regarding
the interrelations of the foreign borrowings, the barter terms
of trade, and the price-level of India throws important light
upon the currency controversies of our country alike new and
old. Thus in their study of the great rise of prices in India
during the first decade of this century, critics like the late
Professor Nicholson and his followers were so obsessed with
the supposed imperfections of the Gold Exchange Standard as
a monetary system that they attributed the rise of prices
entirely to these imperfections and drawbacks and lost sight
of the great importance of the changes in the volume of our
foreign trade, especially of the increased volume of our exports.
The errors of these critics might, however, be condoned to a
12 India's Balance of Indebtedness
considerable extent, since they were writing before the labours
of Professors Taussig and Viner as well as of others showed the
true relations between the position of a country in inter-
national trade and capital market and the price-level pre-
vailing in it. Basing myself on the results and theories of these
eminent writers I showed in my Indian Currency System that
it was the increasing demand for Indian exports and the
improved position of India in international trade which were
in the main the ultimate causes of the rising prices of India.
Mr. Pandit has worked out the topic at even greater length
and with a wealth of statistical material; and he has demon-
strated the bearings of the increased demand for India's
exports and of her borrowings on the country's price-level
at the time.
A study of Mr. Pandit's book will benefit alike the student
of economic theory and one who is interested in the monetary
and financial history of our country. There are notable studies
in the work of India's commodity balance of trade, its balance
of service transactions, and its balance of non-commercial
transactions. There is a good deal that is original in these
chapters as also in the examination of the amount of foreign
capital invested in India. Then follows a comprehensive and
careful study of the mechanism of adjustment, of the adjust-
ment of the balance payment and changes in relative price-
levels.
I can best conclude these few introductory remarks by
expressing a hope that Mr. Pandit's book will secure that
attention from our publicists and students of Economics
which it well deserves; and that it will contribute to the
clarification of ideas on important aspects of problems relating
to our foreign trade and currency.
J. C. COYAJEE
BOMBAY
November J, 1936
CONTENTS
PAGE
PREFACE 9
FOREWORD n
INTRODUCTION 17
PART I
STATISTICAL ANALYSIS
INTRODUCTORY 23
CHAPTER I
INDIA'S COMMODITY BALANCE OF TRADE 25
The Indian Commerce Statistics, 26; Method of compila-
tion, 26; Methods of computing values, 28; Omissions and
inclusions, 29; Selection of the year, 30; Accuracy of Indian
Commerce Statistics, 30; Methods of ascertaining freight
charges, 35; Professor Viner's method, 38; Method of ascer-
taining insurance charges, etc., 45.
CHAPTER II
BALANCE OF SERVICE TRANSACTIONS 49
Freight payments, 49; Freight payments on foreign trade, 50;
Freight payments on coastal trade, 5 1 ; Insurance and banking
payments, etc., 57; Marine insurance, 57; Profits of the Ex-
change Banks, 58; "Home charges/' 61 ; India Office expenses
and the charges for the diplomatic services in Persia and China,
63 ; Payments in connection with civil departments in India, 63 ;
Payment for the management of the debt, 64 ; The Army and
Marine effective charges, 64; Tourists expenditure, etc., 65.
CHAPTER III
BALANCE OF NON-COMMERCIAL TRANSACTIONS 67
Immigrants' capital, 68; Means of remittance from India, 74;
Foreign money-order transactions, 75; British postal orders,
77 ; Through foreign money orders, 78 ; Remittances through
Exchange Banks, 80.
14 India's Balance of Indebtedness
PAGE
CHAPTER IV
INDIA'S BALANCE OF INDEBTEDNESS 84
Councils and Reverse Councils, 84; Cash balances and
reserves of the Secretary of State, 87 ; Railway annuities and
sinking fund, 91 ; India Bills, 91 ; Movement of securities,
92 ; Miscellaneous deposits and remittances, 93 ; Preliminary
balance of international indebtedness, 95 ; Interest payments
by India, 95.
CHAPTER V
CAPITAL INVESTMENTS IN INDIA A VERIFI-
CATION 104
Statistics of international investments, 104; Great Britain's
public investments in India, 106; Edgar Crammond's esti-
mate, 1 08; Sir George Paish's estimate of British investments
in India, no; The extent of British capital in India: H. F.
Howard, 113; Limitations of the preceding estimates, 117;
Verification of Table XXII, 120 ; British private investments in
India, 122.
PART II
MECHANISM OF ADJUSTMENT
INTRODUCTORY 135
The gold-exchange standard, 138.
CHAPTER VI
FOREIGN EXCHANGE AND GOLD MOVEMENTS 140
Foreign exchange, 140; Rupee- Sterling exchange and the
gold-points, 144; Gold movements, 150; Summary, 155.
CHAPTER VII
CHANGES IN RELATIVE PRICE-LEVELS AND THE
ADJUSTMENT OF THE BALANCE OF PAYMENT 157
Index numbers of Indian prices, 159 ; Index numbers of whole-
sale prices in the United Kingdom, 161 ; Sectional price-
levels, 165 ; Domestic, import, and export prices in India, 167;
The generally prevailing explanation of the rise of prices in
India, 171; Summary, 176.
Contents 15
PAGE
CHAPTER VIII
ADJUSTMENT OF THE BALANCE OF PAYMENT
AND THE BARTER TERMS OF TRADE 177
Commodity balance of trade, 177; Foreign borrowings and
the terms of international exchange, 1 82 ; The barter terms
of trade, 1 83 ; The measurement of the barter terms of trade,
184; Indians net barter terms of trade, 185; India's gross
barter terms of trade, 186; Money wages and the barter
terms of trade, 1 89.
CONCLUSION 192
APPENDIX I 195
APPENDIX II 199
APPENDIX III 200
BIBLIOGRAPHY 201
INDEX 209
INTRODUCTION
THE possibility of applying inductive methods in co-operation
with deduction to describe and explain the changes in the
volume and character of international trade, the movements
of price-levels, the part played by exchange rates and gold
movements in the adjustment of trade balances and the reaction
upon internal economic conditions of changes in international
trade, has been proved by the researches in that field made
by the students of Professor Taussig. The quantitative deter-
mination of the division of gains from international trade is
beyond solution by either method, but here also measurement
of relative changes is quite possible. For that, inductive method
can be used both to test the expectations of deductive theory
as to the direction of the change in the division of the gains,
following upon a major disturbance in the conditions governing
international trade, and given the direction of this change to
measure the degree of change in the ratio in which the gains
are divided.
The present study is an attempt at inductive analysis of
the mechanism of adjustment of trade balances, with special
reference to Indian conditions during 1898 to 1913. There
are a good many reasons pointing to Indian trade history
during this period as a particularly fruitful field for research.
To begin with, an inductive investigation of social phenomena,
in order that it may bring results of any definiteness and relia-
bility, must confine itself to factors which in the situation
studied are of sufficient importance to influence appreciably
the phenomena causally related to it. If minor factors in a
complex situation are investigated with the intention of
|neasuring their effects, it is often found that their effects are
So mixed up with the effects of other factors as to be com-
jpletely lost in the complexity of the situation. If, therefore, we
faant to attempt an inductive analysis of the mechanism of
B
1 8 India's Balance of Indebtedness
adjustment of trade balances, the factors creating the trade
balances must be sufficiently powerful to dominate the whole
situation and there must not be any other factor besides
them disturbing the process of adjustment. The period 1898
to 1913 is a period in Indian economic history conforming to
these conditions :
Firstly, this period was marked by a general business prosperity
all over the world punctuated by the crisis of 1907.
Secondly, the even balance between India's credit and debit
international obligations which existed before 1898 was disturbed
during the period by two important factors connected with the
balance of payments, viz. the foreign borrowings and the increased
foreign demand for India's export commodities.
Thirdly, the fluctuations in the rupee-sterling ratio which were
a great disturbing factor to India's foreign trade during the eighties
of the nineteenth century was absent during this period because
of the introduction of the gold-exchange standard.
Out of the two factors disturbing the even balance of pay-
ment we have devoted our attention mainly to the adjustment
of India's balance of indebtedness to foreign borrowings and
only incidentally to the adjustment of trade balances caused
by the increased foreign demand for India's export com.-
modities. The purpose of restricting our attention mainly
to the adjustment of foreign borrowings is to find out whether
the mechanism of adjustment of balance of indebtedness is
the same under a gold-exchange standard as under a gold
standard, and, if different, how far it is different.
The study is divided into two parts. In the first part, which
deals with a statistical analysis of India's annual balance of
payment every year during 1898 to 1913, an attempt has been
made to evaluate all the important items of payment, visible
as well as invisible. The balance of payment itself has been
split up into four parts, viz.: Balance of Commodity Trans-
actions, Balance of Service Transactions, Balance of Non-
commercial Transactions, and the Balance of Indebtedness,
Introduction 19
and each part has been separately treated in detail. Finally,
we have tried to verify the indirect estimate of India's balance
of indebtedness with the help of all the available data bearing
directly on India's foreign borrowings. For the purpose of
this statistical analysis we have considered only the sea-borne
foreign trade of India and ignored the transfrontier trade,
which hardly comes up to 5 per cent of the former. It is
necessary to state here that the estimates of different items
in India's balance of payment made in this part are approxi-
mate at the most.
In the second part we have tried to find out how far the
classical theory of the mechanism of adjustment of inter-
national indebtedness is borne out by Indian conditions
during the period of our study. In this connection we have
examined the course of India's foreign exchanges, gold move-
ments Council Bills price-levels, commodity imports and
exports, and barter terms of trade. However, as the behaviour
of these factors during 1898 to 1913 was influenced jointly
by the foreign borrowings of India and the increasing demand
for her exports, it has not been possible to establish a causal
relation between the behaviour of these factors and the foreign
borrowings alone. Still, a partial corroboration of the classical
theory of the mechanism of adjustment has been obtained.
PART I
STATISTICAL ANALYSIS
INTRODUCTORY
IN order to avoid any misunderstanding we give here a brief
explanation of some of the important terms used in the
following p^ges.
A transaction which creates a pecuniary obligation on the
part of a person in India towards someone outside India is
called a debit transaction, and one which creates an obligation
towards an Indian by a person outside India is called a credit
transaction. The difference between the total of Indian credit
and debit international transactions constitutes India's balance
of indebtedness. If the credits exceed the debits there is a
credit balance of indebtedness, and if the debits exceed the
credits there is a debit balance of indebtedness. The balance
of payments (assuming that all immediate obligations are
immediately liquidated) represents the difference only between
immediate credit and debit obligations and not the difference
between all the credit and debit obligations immediate as
well as deferred which we designate as the balance of indebted-
ness. If some of the transactions are on a deferred payment
basis, as is generally the case, there may be a debit balance of
indebtedness at the same time that there is a credit balance of
payments and vice versa. The commodity balance of trade,
the balance of service transactions, and the balance of non-
commercial transactions represent, respectively, the differences
between the imports and exports of commodities, the imports
and exports of services, and the inward and outward remittances
on non-commercial account, irrespective in each case whether
or not the obligations created thereby are immediate or deferred.
The total of these three balances equals the balance of inter-
national indebtedness, which for any period is equivalent to
the difference between the total foreign loans and the total
foreign borrowings of a country during that period.
In this part of the study, the commodity balance of trade,
24 India's Balance of Indebtedness
the balance of service transactions, and the balance of non-
commercial transactions for India are first estimated for each
year during the period 1898 to 1913 and the balance of India's
international indebtedness is then compiled from these partial
balances. This balance of indebtedness gives an indirect
estimate of the total amount of foreign capital r invested in
India during the period. The correctness of this indirect
estimate of foreign investments in India and indirectly of the
various estimates involved in calculating the partial balances
is then tested by a direct estimate of the amount of foreign
capital invested in India based upon the available information
bearing on such investments.
CHAPTER I
INDIA'S COMMODITY BALANCE OF TRADE
THE term "Commodity Balance" means the balance or the
difference between the values of import and export of goods.
In ascertaining the commodity balance of a country, trade in
precious metals is sometimes included in and sometimes
excluded from the balance sheet, according to the purpose in
view. If the balance is to be struck simply to realize the extent
of immediate obligations during a particular year, which is
not liquidated by any shipment of goods or services, the
transactions in precious metals are excluded. Their main
function in that case is to settle the balance of immediate
obligations in respect of commodities and services which is
to be ascertained. When, however, the purpose is to find out
the balance of all the obligations, immediate as well as deferred,
which is not liquidated even by means of gold and silver, the
trade in precious metals is invariably included in the balance
sheet of commodity transactions.
This part of our study is entirely concerned with a detailed
analysis of our balance sheet and the evaluation of various
items entering the account of our international credits and
debits. To us, therefore, it does not matterwhether in the com-
modity balance of trade we include transactions in precious
metals or not. However, there is a reason which suggests their
inclusion. Since the closure of Indian mints to the free coinage
of silver in 1893, imports and exports of precious metals
(barring the coins, which form a very small proportion of the
total transactions) have been pure commodity transactions,
having no direct relation to the currency circulation in the
country.
Information about the annual foreign trade of India in
goods and treasure is available in the statistical publications
26 India's Balance of Indebtedness
of the Government of India relating to the trade of British
India. These exclude from their purview the trade of French
and Portuguese India, the ports of the Indian Native States,
and the small Indian Dependencies. 1 But the foreign sea-
borne trade of British Indian ports represents "not merely
the trade of the territory directly under British administration,
but rather the trade of the whole of India and Burma, including
the Indian States."
In order to be able to understand and interpret the figures
relating to our sea-borne trade which are given in the various
statistical publications of the Government, it is essential to
know the method of their compilation, the system of com-
puting their values, the items they include and exclude, and
the unit of period for which they are made up.
THE INDIAN COMMERCE STATISTICS
(i) Method of Compilation
The statistical data for the foreign trade of British India are
first collected by the Customs Department and are based upon
values declared by importers and exporters. The declarations
in the "Bills of Entry" and "Shipping Bills" are, however,
checked by Customs officials before they are recorded for
statistical purposes. The figures thus collected are reworked
by the Commercial Intelligence Department into other forms
and are published with elaborate classification in the Annual
Statement of the Sea-borne Trade and Navigation of British
India for fiscal years ending March 3ist, and with less detail
in the ^counts relating to the Sea-borne Trade and Navigation
of British India for the calendar year. Since April i, 1911,
statistics of imports have included all goods landed on Indian
shores, even though some of them might be imported for
re-export; the imports are credited to the country which
1 League of Nations' Memorandum on Balance of Payments and
Foreign Trade Balances, 1910-23, vol. ii, p. 317.
India's Commodity Balance of Trade 27
sends them directly to India without any break of journey,
except for change of conveyance or route. The country con-
cerned may not necessarily be the producer of the goods; it
is sufficient if it owns them at the time they are exported. 1 In
the case of exports a distinction is made between exports of
Indian merchandise goods produced or manufactured in
India and exports of foreign merchandise, i.e. goods im-
ported from foreign countries for re-export. 2 The exports and
re-exports are both credited to India and debited against the
countries of final destination irrespective of their possessing a
sea-borne trade or not. The double entry of re-exported goods,
first in the statement of imports and then in the statement of
exports, prevents them from having any serious effect on
India's commodity balance of trade, the accretion or decretion
of values of the re-exported goods due to a change in their
prices in the interval between their import into India and
their re-export from it and also due to the addition of ware-
housing charges being very small. In addition to the figures
thus collected from the declarations of importers and ex-
porters, articles imported and despatched by parcel post
and registered letter post are also adequately recorded
though they are not classified according to the nature of their
contents; they appear under the general heading of Postal
Articles.
Prior to April i, 1911, imports and exports were credited
to the countries in which the port of shipment for imports
and the port of discharge for exports were situated. It was
1 "The country of consignment is defined as 'that from which the
goods have come whether by land and sea or by sea only, without
interruption of transit save in the course of transhipment or transfer
from one means of conveyance to another/ " Accounts relating to the
Sea-borne Trade of India. Introductory Notes.
a "Tne country of final destination is defined as 'that to which
goods exported from India are intended to pass whether by sea and
land or by sea only, without interruption of transit save in the course
of transhipment or transfer from one means of conveyance to
another.' " Ibid.
28 India's Balance of Indebtedness
natural, therefore, that countries like Switzerland, which had
no sea-borne trade whatsoever, never made their appearance in
the Indian statistical tables. "Moreover, although the port of
discharge for exports was taken to mean the final port in cases
of transhipment, the port of shipment for imports was in
cases of transhipment taken to be the port of transhipment
and not the original port of shipment except in those cases, by
no means general, where a through bill of lading had been
granted." 1
(2) Methods of Computing Values
In computing the values of Indian imports and exports the
methods used are those which are common to the majority of
commercial countries in the world. Imports are valued on
their arrival at the port of entry, freight, insurance, and trans-
port charges being included, i.e. on what is technically known
as the c.i.f. basis (c.i.f. = cost, insurance, and freight). On
the other hand, these charges are excluded in computing
the values of our exports, which are therefore said to repre-
sent f.o.b. values f.o.b. meaning free on board ship. The
values recorded by the Customs Department in India for
statistical purposes are the actual market values which are
arrived at by deducting from the wholesale cash price of the
goods concerned the genuine trade discount which the goods
of the like kind are likely to command, when sold at the time
and place of importation or exportation as the case may be.
No other abatement or deduction in their values is effected
unless it be the amount of duties payable in the case of imports.
When, however, the wholesale cash price of a particular com-
modity, imported or exported, is not ascertainable, the com-
modity being altogether new to the market, the recorded value
represents the cost at which goods of the like kind and quality
could be delivered at such place with the necessary modifica-
1 Accounts relating to the Sea-borne Trade of India. Introductory
Notes.
Indicts Commodity Balance of Trade 29
tions in respect of duties and trade discounts. These recorded
values do not necessarily represent the actual cash prices
receivable or payable by India on her exports or imports.
The existence of a higher level of import duties induces the
importer to understate the value of his goods. (The higher the
level of import tariff the larger the percentage of under-
valuation which is likely.) The League of Nations in cal-
culating the balance of payments of different countries allows
an extra 5 per cent for the possible undervaluation of imports
in this manner. But we must remember that the League's
calculations refer to post-war years when the general level
of import duties in the world was fairly high. On the other
hand, the level of duties in India during the period of our
study was much lower and hence a much smaller allowance
should be made for the undervaluation of her imports. We
have in our study corrected the recorded values of Indian
imports by making an allowance of i per cent for under-
valuation.
(3) Omissions and Inclusions
In every country the recorded statistics of imports and exports
take account of certain articles which, according to the strict
theory of international trade, ought to be totally excluded,
while others which ought to be included are ignored. This is
due to the "conditions peculiar to the trade" of different
countries or the result of some long-standing practice in the
department responsible for the collection of statistics. We must
therefore search out the unscientific inclusions and omissions
of this character in the statistics of commodity imports and
exports of India and make allowance for them in striking the
commodity balance.
One such item is "settlers' effects." The value of all dutiable
articles found in the luggage of passengers is recorded along
with the imports of commodities. But these articles move with
their owners and do not give rise to any international obliga-
30 India's Balance of Indebtedness
tions. Again, though the movements of dutiable luggage
apparently resemble capital movements, they are really quite
different because they do not necessitate payment of interest
and repayment of the principal. Hence the value of "settlers*
effects'* included without justification in the statistics of
commodity imports must be deducted. On the other hand, the
"fish caught in extra-territorial waters and landed direct
from the fishing-grounds," imports of ships except those for
inland or harbour navigation and the imports of diamonds
and other precious stones, 1 which are not reckoned in our
trade statistics, must receive due consideration in India's
commodity balance of trade. However, as neither of the items
enumerated above can be evaluated even approximately and
as they are comparatively insignificant in value, we shall ignore
them.
(4) Selection of the Year
For the sake of this study, which comprises the pre-war period
of the Gold-Exchange Standard, we have selected the Indian
fiscal year as our basis. This is mainly because the major
portion of Indian statistics is published for the fiscal year
only, and as we may have to correlate our trade figures with
other economic data, which are also published for the fiscal
year, it will save us a good deal of trouble if we choose the
fiscal year rather than the calendar year. 2
(5) Accuracy of Indian Commerce Statistics
We have now examined the basis of our commercial statistics
and the system of their collection and tabulation. We shall
1 G. Findlay Shirras, "India's Real Balance of Trade." A paper
read before the Seventh Indian Economic Conference. Proceedings,
p. 72.
* Wherever it will be necessary to adjust calendar year figures to
the fiscal year basis the adjustment will be brought about on the
assumption of equal monthly distribution of the data for the whole
of the calendar year.
India's Commodity Balance of Trade 31
next see how far they are accurate and what are their draw-
backs. In the first place, our statistical records are often faulty.
In many cases the figures for a particular item do not agree
with the figures for the same item presented in a later issue
of the same publication. The discrepancies, though not big
enough to upset rough calculations, are sufficiently embar-
rassing to an honest researcher. In a situation like this we
have to rely on our discretion for the selection of proper
figures, which leaves a margin, however small, for error. The
second and the greatest defect of our commercial statistics is
their lack of uniformity. Even if the frequent changes in the
system of classifying the traded goods with which we are not
immediately concerned be ignored, the changing monetary
unit in which values are expressed is extremely embarrassing.
Till 1873-74 th e values of imports and exports were expressed
in pounds. From 1873-74 to 1898-99 they were recorded in
rupees. There was a reversion to the sterling basis in the
latter year when again the pound was selected as the unit of
recorded values and remained as such till the year 1913-14.
Since that year the rupee has been used as the unit of value.
Fortunately, however, these changes do not affect the period
of our study 1898-1913. During these years all foreign trade
values were, as we have noted, recorded in pounds and we
have only to convert them into rupees to make them directly
comparable with other figures. Thirdly, sometimes even the
columns of the statistical tables are not properly captioned
and footnotes are not given where they are absolutely necessary
to avoid misunderstanding and wrong interpretation. In spite
of these defects, however, we have to rely on official statistics
as the only source of our information, allowing for their in-
accuracies and inconsistencies before we draw important
conclusions.
Table I represents the balance of transactions in mer-
chandise, including Government stores.
Statistics regarding the imports and exports of treasure
34
Indicts Balance of Indebtedness
India do not show a proportionate increase with the total net
imports of precious metals.
Table II shows India's balance of transactions in precious
metals.
Now, it might appear at first sight that given the balances
of transactions in merchandise and treasure, calculation of
TABLE II
BALANCE OF TRANSACTIONS IN TREASURE
(In lakhs of Rupees)
Imports*
Exports
Government
Private
Government
Private
1
Year
Account
A ccount
Total
Account
A ccount
Total
1898-99
I
1,789
1,790
741
741
1899-00
I
2,096
2,097
795
795
1900-01
812
1,646
2,458
675
748
1,423
1901-02
94
1,965
2,059
300
847
1902-03
13
2,525
2,538
85
869
*954
1903-04
658
3,194
3,852
689
804
1,493
1904-05
648
3,302
3,950
844
809
1,653
1905-06
1,072
2,092
3,164
I O2
1,444
1,546
1906-07
1,737
2,720
4,457
57i
1907-08
946
3,282
4,228
545
545
1908-09
ii
2,262
2,273
36
595
' 631
1909-10
9
3,742
3,751
638
638
I9IO-II
7
3,966
3,973
712
712
I9II-I2
5
5,341
5,346
1,037
1,037
1912-13
1,063
5,120
6,183
358
705
1,063
1913-14
682
3,662
4,344
3
705
708
* Import values presented in these columns include
freight and
insurance
charges.
the commodity balance of trade is only a step further. But
this is not so. As we have already seen, the recorded values of
our imports include freight and insurance charges in addition
to their cost prices. In a purely commodity balance of trade,
however, payments for invisible items like freight and insurance,
which are in the nature of services, ought not to figure. The
values of these items, therefore, will have to be deducted from
the recorded values of our imports before we can strike a
pure commodity balance.
Here we come face to face with a great difficulty. No separate
India's Commodity Balance of Trade 35
statistics of freight and insurance charges payable by India
are published. In fact, no country in the world publishes
them. Economists and statisticians, 1 however, have evolved
a few indirect methods of ascertaining the freight charges
earned or the freight bill paid by a country. We shall
examine thesp methods and see hgw far they are available
for ascertaining freight charges paid on Indian imports
during 1898-1913.
METHODS OF ASCERTAINING FREIGHT CHARGES
The first method is based on the reasoning that "since the
imports and exports of the whole world are, for the most part,
the same goods valued at the point of arrival and departure
respectively, the excess of value of imports should give a rough
measure of the difference of valuation due to the cost of ocean
carriage, including freight, insurance, and other charges. "*
Sir Robert Giffen makes use of this method in his paper on
The Use of Import and Export Statistics y read before the Royal
Statistical Society. Giffen estimates the excess of the value of
world imports over world exports. This sum is assumed to be
equal to the freight and insurance charges paid on the world
trade. Making a further assumption that the freight and in-
surance charges on a country's import trade are the same pro-
portion of the value of its imports as the total of the world's
freight and insurance charges are to that of total world imports,
the freight and insurance charges payable by any country
can be easily ascertained.
The implicit assumption of this method is that all import.
1 Sir R. Giffen, "The Use of Import and Export Statistics, "Journal
of the Royal Statistical Society, June 1882.
C. K. Hobson, Export of Capital, "Measurement of the Balance
of Trade," Economica, May 1921.
J. Viner, Canada's Balance of International Indebtedness,
G. L. Wood, Borrowing and Business in Australia.
* Edgar Crammond, The British Shipping Industry, p. 17. Quoted
by J. Viner, op. cit., p. 65.
36 India's Balance of Indebtedness
values are recorded c.i.f. and all export values f.o.b. in
statistics of world commerce. In the case of many countries,
however, this is not true. For example, in the United States of
America, Canada, British South Africa, Cuba, Mexico, and
Philippines import statistics are based upon f.o.b. values.
Naturally, the excess of world imports over worjd exports in
value, will not include the freight and insurance charges on
the import trade of these countries, which constitutes a con-
siderable proportion of the world's import trade. Thus the
accuracy of the primary data used in this method will suffer.
Secondly, prior to the relevant publications of the League of
Nations, there was no authoritative compilation of statistics
relating to the world's import and export trade, which is also a
great handicap in the use of this method. Thirdly, a great
many countries compile their trade statistics on the basis of
official valuations which are arbitrary in character. The amount
of error that creeps into the primary data from this fact could
have been largely reduced if the same method of "official
valuations" was applied to both imports and exports. But
that is not always the case, e.g. in Greece import figures are
based on an official valuation made in 1899, while exports are
valued at current average prices. 1 In addition to these diver-
gent practices, the adoption of different fiscal years and of
different definitions of imports and exports by different
countries for statistical purposes render consolidation of com-
mercial data for the world as a whole extremely difficult.
But even if all these drawbacks could be ignored the applica-
tion of a world percentage of freight and insurance charges to
individual countries which differ widely from one another in
the degree to which their trade is bulky or comes from close-
by regions or is frontier traffic, has no justification whatsoever.
The second method is to ascertain the receipts per ton of
shipping for foreign Mercantile Marines, for which official
1 C. K. Hobson, "Measurement of the Balance of Trade," Eco-
nomica, June 1921, p. 133.
India's Commodity Balance of Trade 37
statistics are published in Sweden and Denmark, or for those
shipping companies in the country itself which publish similar
information, and to deduce therefrom the receipts of the
country's aggregate tonnage engaged in foreign trade. This
method can be used to calculate the earnings from shipping
of a country 'which possesses Mercantile Marine. In the case
of Great Britain it has been successfully used, because she has
the largest Mercantile Marine in the world. But our objective
is to estimate the freight and other charges paid on her import
trade by India, which does not possess any Mercantile Marine.
We can, however, assume that the earnings of foreign shipping
engaged in India's international trade are, after certain deduc-
tions, equal to the freight and insurance charges on that trade.
But this would not help us very much. In the first place the
earnings per ton of foreign shipping for which figures are
available are the averages of earnings made over all sea-routes.
Secondly, even if we assume that the earnings per ton on
Indian trade were equal to these averages, we shall get com-
posite figures for receipts on import and export trade, while
we really want to have the figures for our import trade only.
A third method of estimating the freight earnings or pay-
ments of a country is to consider all the shipping tonnage
engaged in her foreign trade as time-chartered and add to the
charter money the charterer's disbursements for bunker coal
and port dues. The aggregate of these charges would be the
gross earnings or gross payments of a country on account of
freight. If the foreign trade is carried in foreign as well as
national bottoms, adjustments will have to be made according
to the proportion of foreign and national shipping. The amount
of charter money can be calculated from the published market
rates, and expenditure on bunkers can be reckoned on the
basis of the average consumption of coal per ton of shipping.
The most serious drawback of this method is that charter
rates are available only for tramps. Liners which sail at regular
intervals, which have a faster speed and which carry a con-
38 India's Balance of Indebtedness
siderable proportion of freight, naturally earn more. But
allowance for the superior earnings of the liners cannot be
made by means of any known method. Another objection to
this method, which is a corollary to the first, is that "move-
ments of tramp freights are not a satisfactory index to move-
ments of other shipping rates/' The earnings of tramp vessels
are more fluctuating than the earnings of other kinds of vessels.
For India this method has been used by Mr. S. N. Haji
(Manager, Scindia Steam Navigation Company, Ltd., Rangoon)
to estimate freight charges on India's imports and exports in
the year 1921-22. It is, however, not possible for us to use this
method for the present study. Charter rates (or the index of
charter rates) for tramps engaged in India's import trade during
the period 1898-99 to 1913-14 are not available. Moreover,
for reasons already stated, the method is theoretically defective.
There is a fourth method which was invented by the
British Board of Trade for ascertaining the percentage increase
in British shipping earnings between 1913 and 1920.* The
important ocean trade routes of the world were grouped into
thirteen main routes and the distribution of British shipping
on these routes was ascertained. Then from the published rates
of freight for important commodities the approximate receipts
for each route were calculated. But this method also cannot be
of any use to us as the distribution of shipping on the Indian
trade route, which is considered as one of the main routes,
cannot be ascertained for the individual years covered by the
period of our study.
PROFESSOR VINER'S METHOD
J. Viner in his critical study of Canada s Balance of International
Indebtedness has used a different method for calculating the
freight charges payable by Canada. 2 He collects the average
freight rates per ton, from United Kingdom to Montreal, on
1 The Board of Trade Journal, February 3, 1921, p. 116.
a J. Viner, Canada's Balance of International Indebtedness, p. 68.
India's Commodity Balance of Trade 39
iron and steel manufactures and cotton textiles for a normal
year in the period of his study. He assumes these two groups
of commodities to represent the bulky and light articles
respectively, comprising Canada's import trade with Great
Britain, and computes the percentage of freight charges to
their import* values per ton. Next, the actual proportions of
bulky and light articles in the imports are obtained and the
crude percentages are weighted and averaged. This weighted
percentage is then applied to the total value of Canada's
imports from Great Britain and the total absolute freight
charges are obtained. To use this ad valorem percentage for the
other years making up his period, he makes adjustments for
changes in freight rates, prices, and the proportion of bulky
and light commodities from year to year. This method has been
slightly elaborated and applied to Australian conditions by
G. L. Wood. The improvement consists in the selection of a
large number of articles to represent the import trade, instead
of a group or two as done by Viner. "The device finally selected
consisted of taking the analysis of imports into classes made by
the Commonwealth Statistician, and loading for a normal
year a sample cargo representative of all lines imported in a
typical ship of 15,000 tons displacement. . . . For a normal
cargo composed in this way it was calculated that the value at
prices prevailing in 1908 was approximately 230,000, upon
which the freight payable at 1908 rates would amount to about
15,000, i.e. 6 per cent." 1
This method of ascertaining freight charges is best suited to
the Indian situation and is likely to give more reliable results
than any of the other methods discussed before. We have
already rejected these either on the ground that their bases
are faulty or that they are inapplicable to Indian conditions.
So by a process of elimination we come to select the method
used by J. Viner. But before proceeding to utilize it we shall
have to make certain assumptions. We assume that the ad
1 G. L. Wood, Business and Borrowing in Australia, p. 147.
40 Indicts Balance of Indebtedness
valorem percentage of freight charges to the value of our import
trade with Great Britain is applicable to our import trade with
all countries. This assumption can be justified on the ground
that India's import trade with Great Britain during the period
under consideration was more than 60 per cent of her total
import trade. We assume, further, that the freight rates on
imports of cotton manufactures, chemicals, and iron and
steel goods can be made use of to represent the rates on
imports of important groups of commodities which covered
the whole or the major portion of India's import trade
during the period. Cotton manufactures stand for all kinds
of textile fabrics, which are the most important group of
our imports. Chemicals fall into a category by themselves
on which import freights are exceptionally high and the
manufactures of iron and steel represent the heavy and bulky
commodities.
Instead of strictly adhering to Viner's method and ascer-
taining the ad valorem percentage of freight charges to import
values for a normal year we shall calculate the average of the
ad valorem percentage of freight charges to import values for
the years 1904-5, 1905-6, 1906-7.* This departure from the
original method has been made to ensure greater accuracy
in results. The next step is to collect information on the
following points:
(i) Average freight rates per ton on the representative
commodity groups from the United Kingdom to
Bombay and Calcutta, the chief ports of import
in India, for the years 1904-5, 1905-6, and 1906-7.
(ii) Average import values per ton of the commodity groups
for the three years.
(iii) Conversion rate from measurement to weight basis
for cotton manufactures, the import values of which
are given per yard and freight rates per ton.
Instead of one normal year we have taken three normal years.
India's Commodity Balance of Trade 41
(iv) The respective shares of our import trade represented
by the three groups of commodities during the three
years.
The data for freight charges and import values are available
in K. L. Dutta's report on Indian prices.
For computing the conversion rate of cotton goods from
measurement to weight basis we have to rely on information
collected from different sources. The Statistical Abstracts for
the United Kingdom supplies figures for the annual exports of
cotton piece-goods in yards only. Professor J. W. Daniels and
J. J. Jewkes, in an article in the Economic Journal \ give the
average of piece-goods exported by Great Britain during
1909-10 to 1913-14 in metric tons. 1 Hence by calculating a
similar average of piece-goods exports in terms of yards we can
get the rate of conversion for the piece-goods exported by the
United Kingdom during those years. From this we can deduce
the conversion rate for India. 2 About 90 per cent of the cotton
piece-goods imported by India during the period under study
were of British manufacture. But the goods taken by India,
as shown by the post-war particulars, must have been sub-
stantially lighter, somewhat wider on average, and of cheaper
grade than the mass of other exports.3 Making allowance for
1 Professor J. W. Daniels and J. J. Jewkes, "The Crisis in the
Lancashire Cotton Industry," Economic Journal , March 1927.
* Statistical Abstracts for the United Kingdom. Average exports of
piece-goods by the United Kingdom during the period 1909-13 = 6,476
million yards. Economic Journal^ March 1927, p. 39, average exports
of piece-goods by the United Kingdom during the period 1909-13
= 526,837 metric tons.
i metric ton = 12,292 yards,
i.e. i Ib. = 5 6 yards.
There are two assumptions made here which might be stated : (a) that
the average for 1903-13 applies for the earlier years; (b) the average
for all British exports applies to exports to India.
3 A. W. Flux, "British Export Trade/' Economic Journal, December
6, p. 558.
42 Indicts Balance of Indebtedness
this factor, the conversion rate for cotton piece-goods imported
in India is assumed to be i Ib. = 5 -4 yards.
All the other necessary data for computing the ad valorem
percentage of freight charges to import values according to
the method adopted by us are presented in Table III.
TABLE III
IMPORT VALUES AND FREIGHT RATES
(Average of three years 1904-05 to 1906-07)
Percentage
Average
Average
of Freight
Import
Freight
Charges to
Final
Value*
Rate
Import
Average
Percentage
Commodity Group
per Ton
per Ton^
Values
Weights
(weighted)
Rs.
Rs.
Cotton manufactures
1,701
10-75
0-6
31
18-6
Chemicals
182
27-5
15-0
2
33'0
Iron and Steel Manu-
factures!
6-2
67
4i5'4
467-0
4 7 per cent.
* K. L. Dutta: An Enquiry into the Rise of Prices in India, vol. iii,
p. 486 Values c.i.f.
f K. L. Dutta: Ibid., vol. iii, p. 484 Values c.i.f.
t The ad valorem percentage of freight charges to import values
in the case of iron and steel manufactures relates to galvanized plates,
sheets and plates, steel bars, and railway plant and rolling stock.
The average of the weighted ad valorem percentage of
freight charges to import values for the three years 1904-5,
1905-6, 1906-7 has now been calculated. To apply this per-
centage to the other years during the period 1898-99 to 1913-14
we have to take into account the changes in the relative weights
of representative commodity groups, freight rates, and prices
every year.
The weights of representative commodity groups and the
corresponding ad valorem percentages of freight charges to
import values are given in Table IV.
India's Commodity Balance of Trade 43
The changes in the weights as we see are not considerable
and consequently they are not expected to affect the ad valorem
percentage of freight charges in any way seriously. But the
case is different with the other two factors to be considered.
K. L. Dutta's report on Indian prices gives freight quotations
on all the important commodities imported on Government
TABLE IV
WEIGHTS OF REPRESENTATIVE COMMODITY GROUPS AND THE AD
VALOREM PERCENTAGES OF FREIGHT CHARGES*
Percentage
Heavy of Freight
Year Fabrics Chemicals Commodities Charges
1898-99 34 2-8 63 4-5
1899-00 35 2-7 62 4-5
1900-01 33 2*3 65 4-6
1901-02 34 2-5 63 4-5
1902-03 31 2-7 66 4-7
1903-04 28 2 -4 70 4*9
1904-05 32 2.2 66 4- 6
1905-06 34 2-3 64 4-5
1906-07 27 2*0 71 4-9
1907-08 30 2*0 68 4-7
1908-09 30 2-2 68 4-7
1909-10 29 2- 3 69 4-8
1910-11 30 2*1 68 4-7
1911-12 29 2-0 69 4*8
1912-13 31 i'8 67 4-6
1913-14 32 i -9 68 4-7
* Compiled from the Statistical Abstracts for British India.
account. We assume that these quotations are applicable to
the imports of similar merchandise on private account. This
assumption cannot be seriously questioned, as the Govern-
ment are not reported to receive any special concessions in
freight rates. Applying these quotations to our representative
commodity groups we have compiled a weighted index number
of inward freights. However, these freight quotations are
available only for the period 1901-2 to 1912-13. For the years
prior to 1901-2 we shall use the Board of Trade's outward
44 India's Balance of Indebtedness
freight index, as has been done by J. Viner when faced with a
similar difficulty. 1 Then there remains the year 1913-14, for
which we shall have the Australian freight index, 2 TheVeason
for selecting Australia and not Canada or any other country for
supplying us the index of freight rates is quite obvious. Aus-
tralia lies at the extremity of the same ocean trade Voute which
connects India with the United Kingdom and the composition
of her import and export trade and of the shipping engaged in
it are similar to those of India. The freight indices of the
Board of Trade and of Australia have been adjusted to the
Indian fiscal year basis to incorporate them into the Indian
freight index. The adjustment is made on the assumption of
equal monthly distribution. All the three indices have been
readjusted to the average of three years, 1904-5 to 1906-7,
as the basis and the new index represents the movement of
inward Indian freight rates during the period of our study.
As regards the index of prices in Great Britain we shall
use the Board of Trade's figures. Like the freight index this
index also has been adjusted to the fiscal year basis and re-
adjusted to the average of three years 1904-5, 1905-6, and
1906-7.
The ad valorem percentage of freight charges to total
imports as computed in Table IV after making allowance for
changes in the weights of the representative commodity
groups, "multiplied for each year by the freight index and also
by the reciprocal of the price index, will give the ad valorem
percentage of freight charges to imports for each year in the
period." The final calculation of freight charges payable by
India on her imports is presented in Table V.
The irregular movement of freight rates indicated by the
freight index is largely due to the prevalence of tramps in the
Indian Ocean. At the beginning of the twentieth century
1 J. Viner, Canada's Balance of International Indebtedness, 1900-13,
P- 74-
3 G. L. Wood, Borrowing and Business in Australia.
India's Commodity Balance of Trade 45
freight rates were unusually high because of the Boer War,
but they declined sharply after the conclusion of the war
and did not recover till after 1906.*
TABLE V
FREIGHT PAYMENTS BY INDIA
Percentage
of Freight
Percentage
Freight
Imports
Charges
allowing
Freight
Price
of Freight
Charges to
Payments
by India%
Year
Rs. 1,00,000
for Weights
Index*
Index^
Imports
Rs. 1,00,000
1898-99
9,072
4*5
i,i58
936
5'4
471
1899-00
9,702
4'5
I,2I2
949
5'9
553
1900-01
10,628
4-6
1,231
948
5*5
567
1901-02
11,021
4*5
1,503
973
6-6
706
1902-03
1 1, 206
4'7
1,368
979
6-6
720
1903-04
13,204
4*9
1,069 -
1,001
5'4
695
1904-05
14,495
4-6
1,057
988
5*o
707
1905-06
15,497
4*5
1,194
989
5'4
818
I 906-07
16,298
4'9
748
,023
3*4
542
1907-08
l8,029
4*7
86 1
,055
3'8
671
1908-09
15,280
4*7
1,234
,037
5-6
838
1909-10
16,139
4-8
977
,058
4*3
680
1910-11
17,477
4'7
892
,097
3'8
648
I9II-I2
19,895
4-8
i,059
,116
4*3
829
1912-13
23,013
4-6
1,284
i,i59
5*0
1,127
1913-14
23,666
4'7
i, 43 1 II
i,i73
5'6
1,299
* 1900-01 to 1912-13 compiled from K. L. Dutta's Report on Indian
Prices, weighted and adjusted to the average of 1904-05, 1905-06, and
1906-07.
f W. T. Layton, An Introduction to the Study of Prices, adjusted to the
average of 1904-05, 1905-06, and 1906-07 basis.
J For calculating freight payments the value of re-exports has been de-
ducted from the total value of imports.
Compiled from the Board of Trade Freight Index adjusted to the
Indian Fiscal Year basis and to the average of 1904-05, i9O5-o6,and 1906-07.
|| Australian Freight Index adjusted to the fiscal year basis and to the
average of 1904-05, 1905-06, and 1906-07.
METHOD OF ASCERTAINING INSURANCE CHARGES, ETC.
In addition to freight charges, insurance and other commission
charges have also to be deducted from the c.i.f. import values
before we can strike a pure commodity balance of trade for
1 The Economist, February 16, 1901, "Commercial History and
Review of 1900": "Outward freights to the East were most favourably
affected by the demands of our Government necessitating their paying
good rates to the Cape for prompt tonnage."
India's Balance of Indebtedness
TABLE VI
INDIA'S COMMODITY BALANCE OF TRADE
(In lakhs of rupees)
IMPORTS
Year
Commodities*
Treasure^
Total
Imports
c.i.f.
(I + //)
Freight
Charges
on
Imports^
Insurance
and other
Commission
Charges on
Imports
I
II
III
IV
V
1898-99
7,282
1,790
9,072
471
I 3 6
1899-00
7,605
2,097
9,702
553
145
1900-01
8,170
2,458
10,628
567
159
I9OI-O2
8,962
2,059
11,021
706
165
1902-03
8,668
2,538
1 1, 206
720
168
1903-04
9,352
3,852
13,204
695
198
1904-05
io,545
3,950
14,495
707
217
1905-06
12,333
3,l64
15,497
818
232
1906-07
11,841
4,457
16,298
542
244
1907-08
13,801
4,228
l8,029
671
270
1908-09
13,007
2,273
15,280
838
229
1909-10
12,388
3>75i
16,139
680
242
I9IO-II
13,504
3,973
17,477
648
262
I9II-I2
14,549
5,346
19,895
829
298
1912-13
16,830
6,183
23,013
1,127
345
1913-14
19,322
4,344
23,666
1,299
354
* Supra,
Table I. f
Supia,
Table II.
J Supra,
Table V.
India's Commodity Balance of Trade
TABLE VI 'continued
INDIA'S COMMODITY BALANCE OF TRADE
(In lakhs of rupees)
47
IMPORT%
EXPORTS
Total
Freight and
Insurance
Charges, etc.
(IV + V)
Net
Imports of
Commodities
and Treasure
(1 1 1 -VI)
Commodities*
Treasure]
T
Total
Exports
(VIII + IX)
Commodity
Balance
of Trade
(X-VII)
Credit
VI
VII
VIII
IX
X
XI
607
8,465
II,28o
741
12,021
3,556
698
9,004
10,909
795
11,704
2,700
726
9,902
10,770
1,423
12,193
2,291
871
10,150
12,489
i,H7
13,636
3,486
888
I0,3l8
12,939
954
13,893
3,575
893
12,311
15,352
i,493
16,845
4,534
924
13,571
15,772
1,653
17,425
3,854
1,050
14,447
16,184
i,546
17,730
3,283
786
15,512
17,703
571
18,274
2,762
941
17,088
17,719
545
18,264
1,176
1,067
14,213
I5,3H
631
15,945
i,732
922
15,217
i8,799
638
19,437
4,220
910
16,567
20,996
712
21,708
5,141
1,127
18,768
22,798
i,037
23,835
5,067
M72
21,541
24,622
1,063
25,685
4,144
1,653
22,013
24,901
708
25,609
3,596
48 India's Balance of Indebtedness
India. To evaluate these items we shall have to resort to the
percentage method which we criticize elsewhere. 1 But freight
rates are determined by factors which are almost independent
of the value of goods transported. A change in any of these
factors is likely to affect the freight rate and consequently
its relation to the value of commodities, ard we show
that these factors are always in a flux. Moreover, even if
freight rates remain constant, fluctuations in the prices of
commodities are sure to affect percentage of freight charges
to import or export values. In short, a freight percentage is a
function of two factors which are subject to independent
changes; and hence it cannot be the same for any two years
except by accident. In the case of insurance and other com-
mission charges, however, the situation is different. They are
mainly related to the values of commodities and the rates are
quoted as percentages of these values. These rates were more
or less constant during the period of our study.* Sir Robert
Giffen in the paper already referred to estimated that insurance
and other commission charges amounted to 2*5 per cent of
the value of British exports and imports in the year 1882.
From careful inquiries this percentage has been reduced to
i '5 in the case of India.3 Applying this percentage to Indian
imports we calculate the insurance and other commission
charges payable on account of commercial services.
The final calculation of India's commodity balance of trade
is presented in Table VI.
1 See Appendix I, p. 195.
2 The Economist, February 18, 1905, "The Commercial and
Economic Review. "
3 League of Nations' Memorandum on Balance of Payments and
Foreign Trade Balances, 1910-23, vol. i, p. 20.
CHAPTER II
BALANCE OF SERVICE TRANSACTIONS
IN the international transaction of a country, exchange of
services is as important as the exchange of commodities. Like
imports and exports of commodities, imports and exports of
services create debits or credits against it or in its favour. They
are often overlooked not because of their unimportance in the
volume of international transactions, but chiefly because
official statistics are generally limited to the movement of
physical goods. Service transactions are not recorded by any
country except Argentina, and this absence of records is
largely responsible for the confusion that prevails about their
true character. There still exists a tendency to regard pay-
ment for services as a payment for nothing. However, we
consider exchange of services on a par with exchange of com-
modities as regards their effect on the international trade
balance of a country.
In the case of India there is a large amount of invisible
imports which mainly comprise commercial services. As they
have to be paid for in the same way as imports of commodities
we shall deal with them in this section under the following
headings: freight payments, insurance and banking payments,
"Home Charges," and tourists' expenditure. Statistical infor-
mation on all these items except "Home Charges" is either
very scanty or not at all available. Hence our estimates of
their value have no claim whatsoever to exactitude.
FREIGHT PAYMENTS
Freight payments are payments for the carriage of goods
from one place to another. Almost the whole of India's sea-
borne trade, foreign as well as coastal, was carried on British
D
50 Indicts Balance of Indebtedness
bottoms. Even the small tonnage of Indian shipping which
is now engaged in our coastal trade did not exist during the
period of our study. Obviously, India had to pay for the services
of British shipping. However, she was not responsible for the
payment of these services both on her imports and exports.
In the case of foreign trade it is generally assumed that a
country pays freight charges only on its imports. So far as
coastal trade is concerned, our imports are exports valued c.i.f.
at the ports of importation. Therefore freight payments may be
supposed to have been charged either on imports or exports,
but not on both. In keeping with the practice followed in the
case of foreign trade we assume that they are charged on our
imports. Thus on the whole India has to pay freight charges
only on her imports.
FREIGHT PAYMENTS ON FOREIGN TRADE
We have already calculated the total of our freight payments
on foreign imports. But it was an estimate of gross payments.
A large part of these receipts must have been spent by the
British Shipping Companies in India on harbour dues, for
bunkers, and for the labour of loading and unloading. During
the post-war year 1923-24 the amount of harbour dues paid by
these companies was estimated at Rs. 2,00 lakhs. 1 Besides, a
fairly large number of Indians were engaged by these com-
panies as sailors and lascars. In the census year, 1911, the
total number of Indians employed by the British Shipping
Companies was 2,531: 577 in the Navigation Department,
1,363 in the Engineering Department, and 591 as cooks,
stewards, etc.* A major portion of the wages received by them
is generally spent in India. Similarly British crews during the
stay of their ships in Indian harbours spend a considerable
1 League of Nations' Memorandum on Balance of Payments and
Foreign Trade Balances, 1910-24, vol. i.
Census of India, Repott, 1911, vol. i, p. 112.
Balance of Service Transactions 51
amount of money in India. All this expenditure is ultimately
met out of the gross earnings of British shipping on India's
foreign imports, reducing to that extent the net amount of
freight charges payable by India. In 1882 Sir Robert Giffen
estimated the proportion of such expenditure at one sixth of
gross receipts*. On the other hand, C. K. Hobson, by analysing
the "voyage accounts of two tramp steamers" plying between
all the important ports of import during the period 1907-6
to 1908-9, calculates it at 30 per cent. He states, moreover,
that this percentage may be assumed to remain fairly constant
from year to year. 1 In view of the large number of British
ships permanently located abroad since the beginning of this
century, Sir Robert Giffen's estimate appears to be too low.
We have therefore assumed Hobson's percentage to be true
during the whole period of our study and used 'it to make
deductions from the gross amount of freight charges payable
by India.
FREIGHT PAYMENTS ON COASTAL TRADE
As in the case of freight charges on our foreign trade, there is
no information whatsoever bearing directly on the freight
charges payable by India for the carriage of her coastal trade.
The method generally followed to ascertain these charges is
based on the reasoning that as our coastal imports are exports
valued c.i.f. at the port of importation, the excess of imports
over exports represents freight and insurance charges. This
argument, however, presupposes that the recorded imports
of a particular year are the recorded exports of the same year
valued c.i.f. This may not be necessarily the case. If a large
consignment of goods is exported from a harbour during the
third or fourth week of March, the last month of our fiscal
year for which statistics are recorded, and if the ship takes
1 Cf. "On the whole, therefore, the assumption appears justifiable
that the proportion of foreign expenditure abroad is fairly constant
from year to year." The Export of Capital, p. 173.
52 India's Balance of Indebtedness
more than a fortnight to reach its destination, the goods, while
they will be recorded as exports during that year, will not be
recorded as imports during the same year. It may even be
that the recorded exports of a year may never be recorded as
imports and vice versa. Secondly, if the goods are exported
to ports under the jurisdiction of the Native States, according
to the Indian practice of recording trade statistics they would
appear only on the side of coastal exports, while the exports
from the Native States to British Indian ports would appear
only on the side of coastal imports. If the value of exports to
Native States' ports during a year is much larger than the
value of imports to British India from there, the total recorded
imports of that year instead of showing a surplus over the
total recorded exports of the same year might even show a
deficiency. In fact, this might have been the case during the
year 1899-1900, for which the value of coastal imports is
recorded at Rs. 4,137 lakhs and of exports at Rs. 4,339 lakhs,
showing an excess of Rs. 202 lakhs over the recorded value of
imports. A similar difficulty is presented by the figures of
coastal imports and exports during the year 1897-8, the year
immediately preceding our period. These difficulties greatly
affect the applicability of the general method of ascertaining
freight charges on coastal trade.
It may also be due to this slight discrepancy in the units
of period covered by the recorded statistics of coastal imports
and exports and to the one-sided recording of our coastal
trade with the ports of the Native States, that the excess of
imports over exports shows wide fluctuations. The excess of
imports over exports according to the method we are dis-
cussing constitutes freight and insurance charges. Therefore
the fluctuations in the excess represent fluctuations in the
freight and insurance charges, which are not at all justified by
the changes in freight rates. 1 The excess of coastal imports
over exports and the percentage of the excess to the value of
1 Review of the Trade of India, 1913-14.
Balance of Service Transactions 53
coastal imports, in certain years of the period of our study,
were as follows:
Excess of Im-
Coastal Coastal ports over Percentage of
Imports Exports Exports the Excess to
Year Rs. 1,00,000 Rs. 1,00,000 Rs. 1,00,000 Coastal Imports
1902-03 * 4,025 3,824 201 5
1903-04 4,268 3,924 344 8
1904-05 4,521 4,4io in 2
1905-06 5,050 5,009 41 i
1906-07 5,705 5,335 370 6
1912-13 6,702 6,434 268 4
1913-14 7,125 6,308 817 10
The percentage of the excess, i.e. the percentage of freight
and insurance charges to the value of imports, seems to have
been at almost every figure between i to 10 during the period
1902-3 to 1913-14. It was changing every year except during
the brief interval of 1906-7 to 1912-13, when it was more or
less constant, and the changes were very sweeping. The freight
percentage was 8 in 1903-4. It came down to 2 with a bump
the very next year. Again in the year 1905-6 the percentage
figure stood at i but rose to 6 in 1906-7. Such abrupt changes
in the freight percentage, in spite of very slight variations in
the coastal freight rates 1 and in the character of freights earned,
are sufficient in themselves to discredit the method of cal-
culating the freight charges which equate these to the excess
of coastal imports over exports.
Mr. S. N. Haji has used another method to calculate the
freight bill payable by India on her coastal trade. 3 For the
year 1921-22, to which his calculations refer, Haji ascertains
the average freight rates per ton for the main commodities
carried along the Indian coast. From these various averages he
obtains an all India average. Multiplying the total amount of
cargo carried coastwise by this average freight rate he finally
arrives at the earnings of British shipping engaged in Indian
1 Review of the Trade of India, 1913-14.
a S. N. Haji, Economics of Shipping, p. 320.
54 India's Balance of Indebtedness
coastal trade. However, the data obtained by Haji for the
year 1921-22 are not available for the period of our study and
hence his method cannot be made use of by us.
Therefore, in the absence of a method which can give a
reliable estimate of our freight charges on coasjtal trade we
have had resort to a very rough calculation. Though coastal
imports during a year may not necessarily be the coastal exports
of the same year valued c.i.f., it may fairly be assumed that the
total amount of coastal imports during a long period of years
do represent the total of coastal exports during the same period
valued c.i.f. The longer the period the lesser the percentage
of error creeping into the estimate due to a portion of exports
not being recorded as imports within a given period and a
portion of recorded imports being really the exports of a year
preceding the period. The excess of total imports over total
exports may then be assumed to give an approximate measure
of the total amount of freight charges paid by India during
the period as a whole. During 1898-99 to 1913-14 the total of
India's coastal imports amounted to Rs. 84,536 lakhs, while
the value of exports was Rs. 80,140. The excess value of
imports which comes to Rs. 4,390 lakhs represents freight
and insurance payments by India. This total of freight and
insurance bill has got to be distributed over individual years
to ascertain India's annual debits on that score. For this we
work out the percentage of total freight and insurance charges
to the total value of coastal imports and apply it for individual
years. Obviously the results are subject to a small margin of
error due to the assumption of a constant percentage relation
between import values and freight charges every year while in
fact this might have been changed because of divergent varia-
tions in freight rates and import values. The variations, how-
ever, were not so large as to upset rough calculations.
We see, then, that freight and insurance charges together
on India's coastal trade amount to 5 per cent of the coastal
imports. Professor Findlay Shirras has estimated 15 per cent
Balance of Service Transactions 55
of the freight and insurance charges as payment for finance,
insurance, and other commission charges. 1 By using his estimate
we calculate the percentage of pure freight charges to import
values as 4-25.
This agaijj is an estimate of the gross earnings of British
shipping engaged in India's coastal trade. C. K. Hobson has
already calculated that 30 per cent of the gross earnings of
British shipping engaged in foreign trade were spent abroad.
But this is an average percentage based upon the expenditure
of British ships and crew during all sorts of voyages, including
long voyages with only temporary halts in foreign ports.
Obviously the percentage of expenditure to gross earnings is
bound to be higher in the case of ships permanently located
abroad and which ply between foreign ports only. The British
ships carrying on the coastal trade of India must be spending
a large part of their earnings in purchasing provisions and in
paying the wages of the crew which is mostly Indian. "In
this respect, then, the coasting trade is similar to a firm or an
exchange bank doing business in India and what is transferred
to England is only the profits of the trade. "* Unfortunately,
however, we have not the slightest information available to
ascertain the percentage of these profits to gross earnings.
Taking into consideration that the ships engaged in coastal
trade stay much longer in Indian harbours than the ships
engaged in foreign trade, it can be assumed that about 60 per
cent of their earnings are spent in India. This is a purely
arbitrary figure and perhaps errs on the conservative side.
But on the whole the error resulting from this assumption
will form an insignificant percentage of the volume of Indian
balance of indebtedness and hence may be ignored.
Professor Findlay Shirras in the paper on "India's Real
Balance of Trade in 1922-23," which he read before the seventh
1 G. F. Shirras, "India's Real Balance of Trade," Proceedings
of the Seventh Indian Economic Conference, p. 73.
* G. F. Shirras, op. cit., p. 77.
Indicts Balance of Indebtedness
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Balance of Service Transactions 57
Indian Economic Conference, seems to have unconsciously
ignored the debits to India on account of freight and insurance
charges on coastal trade. He says: "The expenditure for
shipping services and commissions has not been included in
the Balance* of Trade Statement in the final computation,
because under section 30 of the Indian Sea Customs Act the
Indian Import Returns include freights and insurance/' 1 This
reasoning is quite correct so far as our foreign trade is con-
cerned ; but it cannot be applied to coastal trade also, which is
a branch of the domestic trade. Insurance and freight charges
payable by India on her foreign trade appear in the balance
of her international transactions along with the imports which
are valued c.i.f. The coastal imports, however, are not included
in our international transactions and hence freight and in-
surance charges payable on our coastal trade do not figure
in the balance sheet. Therefore these payments should be
separately included in the final computation of India's Balance
of Trade Statement.
Table VII represents the net amount of freight charges
payable by India during 1898-99 to 1913-14.
INSURANCE AND BANKING PAYMENTS, ETC.
Marine Insurance
The earnings of foreign insurance and banking companies
constitute an important item in the balance sheet of India's
international debits and credits. Most of these companies are
branches of British companies registered in Great Britain. In
1882 Sir Robert Giffen calculated the earnings of these con-
cerns at 2-5 per cent of the total of Great Britain's import
and export trade. Professor Findlay Shirras after careful
inquiries has brought down the estimate for India at i 5 per
cent: 0-5 per cent for insurance charges, 0-25 per cent for
banker's commission and bill stamps, and 0-75 per cent for
other minor charges.* In the absence of any direct information,
1 G, F. Shirras, op. cit, p. 73. * G. F. Shirras, op., cit., p. 78.
58 India's Balance of Indebtedness
we have used this estimate to calculate India's insurance pay-
ments on her imports. For coastal trade also Professor Shirras
has calculated that 15 per cent of the gross amount of freight
and insurance charges constitute insurance and banking
payments. Pure insurance payments form one- third of the
latter. On this basis the actual percentage of insurance charges
to coastal imports works out at 0-25. The earnings of the
foreign fire and life insurance companies in India are not
taken into account, first, because they cannot be estimated
even indirectly and, secondly, because they are insignificant
as compared with the total volume of our indebtedness.
PROFITS OF THE EXCHANGE BANKS
"Exchange Banks" is the name applied to foreign banks who
have monopolized the financing of India's foreign trade.
Almost all of them are branches of larger concerns registered
in Great Britain whose operations extend to many other parts
of the world. In 1898-99 the number of such banks transacting
business in India was eight, which increased to twelve at the
end of our period. Of these the Chartered Bank of India,
Australia, and China, the National Bank of India, the Mer-
cantile Bank of India, and the Eastern Bank are said to have
been doing a considerable part of their business in India. 1
The main items of their business are :
(i) Dealings in foreign exchange,
(ii) Discounting and rediscounting of internal bills,
(iii) Agency Work.
Dealings in foreign exchange are the most important source
of profit to the Exchange Banks. Taking out the element of
interest from the composite payment they demand from
1 Indian Central Banking Enquiry Committee, Majority Report^
Balance of Service Transactions 59
importers and exporters there remains a balance which repre-
sents charge for the service of changing money from one
currency into another. It is suspected that this charge is
levied on the whole of our foreign trade and not on the
difference between the import and export operations transacted
by the banks. 1 In fact, it is only for this difference that they
come into the market for more bills or more remittance.
The margin between the deposit rates and the discount
rates indicates the profits of the Exchange Banks in dis-
counting internal bills. It is a patent fact that these banks
receive deposits in India at lower rates of interest than the
Indian Joint-Stock Banks. It is also equally patent that their
discount rate is higher than the bank-rate in India. In most
other countries it is lower than the bank-rate. The profits
earned by the Exchange Banks in discounting internal bills in
India may naturally be expected to be considerably high.
Moreover, by rediscounting in London at lower rates the
export bills discounted in India on the basis of Indian money
rates which arc higher, they earn an additional handsome
commission.
In addition, Exchange Banks make money "by undertaking
agency work, purchase of sterling securities by Indians, general
remittance work, letters of credit, and rents from bank ware-
houses. They handle the bulk of what may be called the
invisible imports of India, and they make profits out of the
movement of permanent capital to India, the withdrawal of
capital and the transfer of income on such capital." They
are also said to have been earning large profits by managing
imports of gold and silver bullion, which was their monopoly
for a long time and which even now accounts for a large part
of their income. Government remittances even are suspected
to be a source of their profits.
Though the profits earned by the Exchange Banks from all
1 Indian Central Banking Enquiry Committee, Minority Report,
p. 214.
60 India's Balance of Indebtedness
branches of their business in India are considered to be very
high, statistical information on this subject is absolutely
lacking. First, there is no way of knowing the amount of
capital employed by the Exchange Banks exclusively in India ;
and secondly, there is no information about the rate of profits
earned by them on purely Indian business. Even the Indian
Central Banking Enquiry Committee, which reported only
recently, could not gather any useful data about the position
of these banks in India. Hence to ascertain their approximate
earnings resort must be had to a very rough calculation.
As to the proportion of the Foreign Banks' capital employed
in this country the Government of India in a letter to the
Secretary of State, dated June 13, 1901, wrote: "It is im-
possible to fix what this proportion may be, but there is
reason to believe that considerably less than one-half of the
capital of these banks could be made quickly available in
India to meet special demands. "* During 1901 to 1913 four
new banks were opened in India. Being new to the field of
their operations they cannot be expected to have a large pro-
portion of their total capital with them. We assume that
about 25 per cent of the total capital of the Exchange Banks
was employed in India during the period of our study. Similarly,
the system recently adopted by the Commercial Intelligence
Department for the classification of these banks suggests that
three of them had a considerable proportion of their business
in India. The average of the profits earned by these three
banks may therefore be taken as a rough measure of the profits
earned by all the banks. But even here the data are incomplete.
Information about the rates of dividend declared by only two
of the three important banks is available and it also does not
cover all the years of our period. The dividend declared by
the National Bank of India was 12 per cent per annum for
1 No. 199, dated June 13, 1901, from the Government of India
to the Secretary of State. Quoted in the Minority Report of the Indian
Central Banking Enquiry Committee, p. 155.
Balance of Service Transactions 61
eight years up to 1912 and 16 per cent for 1913, while the
dividend declared by the Chartered Bank was 14 per cent for
twelve years up to 1918, free of income tax. 1 Thus from 1904
to 1906 we have only the rate of dividend declared by the
National Bank of India, and we assume it to represent the
rate of profits earned by all the Exchange Banks. From 1910
onwards the rate of profits will be represented by the average
of the rates of dividend declared by the National Bank and the
Chartered Bank. In the absence of any information relating
to the years prior to 1904 the dividend declared by the National
Bank in 1904 is assumed to represent the average rate of
profits. Accordingly, for all the years up to 1906 the average
rate of profits will be 12 per cent, from 1906 to 1912 it will
be 13 per cent, and for 1913 it will be 15 per cent.
Payments on account of other minor services in connection
with the movement of goods between India and other countries,
according to Professor Findlay Shirras, amount to 0-75 per
cent of the value of imports. This comes to one-half of all the
payments, exclusive of freight charges. On this basis the value
of minor services performed by foreign agencies in connection
with our coastal trade amounts to o 37 per cent of the coastal
imports.
The estimates of the insurance, banking, and other minor
payments by India are presented in Table VIII.
"HOME CHARGES'*
"Home charges" represent the expenditure incurred by the
Secretary of State for India in England. The main heads of
the expenditure are: establishment of the Secretary of State,
recruitment of persons for civil and military employment in
India and their pensions, purchase of stores and railway
construction materials, and interest on India's sterling debt.
All this expenditure is borne by India and it constitutes an
1 Indian Central Banking Enquiry Committee, Minority Report,
P- 143-
6a India's Balance of Indebtedness
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Balance of Service Transactions 63
important debit item in the balance sheet of her international
transactions. Here, however, we shall consider the India
Office expenses and the charges for the diplomatic services in
Persia and China, payments in connection with the Civil
Departments in India, payment for the management of the
debt, and the Army and Marine effective charges which
represent a payment for services rendered to India. Interest
charges are discussed elsewhere.
INDIA OFFICE EXPENSES AND THE CHARGES FOR THE DIPLOMATIC
SERVICES IN PERSIA AND CHINA
The India Office expenses include the salaries of the Secretary
of State for India, Under- Secretaries, members of the India
Council, and heads of various departments, and other sundry
payments. The charges for diplomatic services in Persia and
China were on account of contributions made by India to the
expenses of the Mission in Persia and of His Majesty's Estab-
lishments in China which were maintained for Imperial pur-
poses. On the recommendation of the Welby Commission,
the Indian payment for the diplomatic services in China
ceased in 1901 and that for the Persian Mission in 1905.
After 1905, therefore, no payment was made by India on this
account.
PAYMENTS IN CONNECTION WITH CIVIL DEPARTMENTS IN INDIA
India has annually to pay large subsidies for telegraphic and
mail services overseas. Till 1908 she had to pay nearly three
lakhs of rupees every year to make good the losses on the
Red Sea Telegraph Line constructed in 1858. An alternative
telegraph communication between India and England via the
Cape and the Mauritius was established in 1890. It is now
known as the Zanzibar Mauritius Cable. India had to pay a
subsidy of Rs. 150,000 a year on account of this Cable
Service. There were also other subsidies payable by India for
mail services in the Persian Gulf, for mail services between
64 India's Balance of Indebtedness
India and England and for the telegraphic service controlled
by the Indo-European Telegraph Department. All these
services are extensions of the Inland Postal and Telegraphic
Service and hence payments for them are called as payments
in connection with the Civil Departments in India.
PAYMENT FOR THE MANAGEMENT OF THE DEBT
Almost every year the Government of India has to appear in
the London Money Market to borrow money. They carry out
these loan transactions through the Banks of England and
Ireland, who are their London agents and who perform all
the necessary services in that connection. It is through these
London agents, too, that payment of interest and repayment
of loans are made. For this agency work the Banks of England
and Ireland receive some remuneration from the Government
of India. In the year 1913-14 it amounted to Rs. 9 lakhs.
THE ARMY AND MARINE EFFECTIVE CHARGES
India has annually to remit to the War Office the cost of
recruiting and training British soldiers for her. Besides, since
the introduction of the " Short- Service' ' system she has had to
contribute to the grant of "Deferred Pay" which is offered
as an inducement to British persons to join the Army. The
British soldiers in India at the end of their tenure of service
which is ordinarily fixed at five years for the officers and
seven years for the privates are sent back to England and
fresh ones are imported. This country had to bear the whole
cost of their transportation before 1900. But since then, on the
recommendation of the Welby Commission, the British Govern-
ment has been contributing Rs. 19-5 lakhs towards this cost.
The payment of marine effective charges during the period
of our study was governed by Lord Rosebery's Award.
According to it India had to pay Rs. 15 lakhs to the Admiralty,
besides bearing the local expenses of the squadron engaged
for the protection of her trade and for general naval defence.
Balance of Service Transactions 65
In Table IX figures of net total amount of these payments
are reproduced from the Statistical Abstracts for British India.
PAYMENTS ON
TABLE IX
ACCOUNT OF "HOME
(In lakhs of rupees)
CHARGES*"
Payments in
India
Connection
Payment
Net Army
Office
with Cwil
for the
and Marine
Year
Expenses
fc.f
Departments
in India
Management
of "Debt"
Effective
Charges^
1898-99
24
19
7
I8 3
1899-00
24
24
6
I6 3
1900-01
25
21
7
153
I9OI-O2
27
25
6
29
1902-03
36
30
6
159
1903-04
36
25
6
117
1904-05
34
27
6
104
1905-06
36
24
6
78
I 906-07
3i
27
7
107
1907-08
34
24
7
118
1908-09
36
19
9
162
1909-10
33
18
9
144
I9IO-H
33
21
10
158
I9II-I2
42
22
9
H5
1912-13
33
22
9
i53
I9I3-H
36
25
9
150
Total
233
217
206
87
231
184
171
144
172
I8 3
226
2O4
222
2l8
217
220
* Compiled from the Statistical Abstracts for British India.
t Include India's contribution for His Majesty's Establishments
in China till the year 1901, and for the Persian Mission till 1905.
J After deducting military receipts in England.
TOURISTS' EXPENDITURE, ETC.
The money spent by foreign tourists in India forms a credit
item in her international transactions, while a similar expen-
diture by Indian travellers abroad constitutes a debit item.
About the expenditure of foreign tourists in India no infor-
mation whatsoever is available for the period of our study.
On the other hand, the expenditure of Indian students reading
in foreign universities, who formed the most numerous class
of Indian visitors to Europe and other countries, amounted to
66 India's Balance of Indebtedness
about 30 lakhs of rupees a year. 1 The remittances to foreign
travellers in India and to Indian students abroad are, however,
made either through the Post Office or through the Exchange
Banks whose transactions we have considered elsewhere.
TABLE X
BALANCE OF PAYMENTS FOR SERVICES EXCEPT INTEREST CHARGES
(In lakhs of rupees)
Total
(Debit)
823
904
933
906
1,050
,034
,059
>i37
,010
,160
,270
,162
,201
,534
,673
* Supra, Table VII. t Supra, Table VIII. *
J Supra, Table IX, does not include interest charges.
Therefore, inasmuch as the expenditures of foreign tourists
in India and of Indian students abroad were met by these
remittances they have already been accounted for.
The net debits to India on account of the import of services
excepting the services of capital are given in Table X.
1 T. Morrison, The Economic Transition in India, p. 192.
Insurance,
Freight
Banking and
Payments
other Minor
Home
Year
by India*
Charges^
Charges].
1898-99
392
198
233
I 899-00
457
230
217
1900-01
479
248
206
1901-02
570
249
87
1902-03
572
247
231
1903-04
559
291
184
1904-05
572
316
171
1905-06
659
334
144
1906-07
476
362
172
1907-08
582
395
183
1908-09
687
357
226
1909-10
572
386
204
1910-11
554
425
222
1911-12
683
461
218
1912-13
903
414
217
1913-14
1,030
423
220
CHAPTER I I I
BALANCE OF NON-COMMERCIAL TRANSACTIONS
NON-COMMERCIAL transactions are a part of the "invisible"
items figuring in the balance sheet of a country. Tributes or
indemnities, pensions and allowances payable abroad, charities,
settlers' effects, immigrants' and emigrants' remittances, and
the capital taken out by them at the time of departure are a
few of the items coming under this category. They are non-
commercial in the sense that the movement of goods on their
account is one-sided in character, requiring no off-setting
payment in the opposite direction. However, like all other
transactions they do affect the balance of international credits
and debits. The French indemnity of 1873, the remittances
of immigrants 1 in America during the pre-war times, and the
post-war flood of American charities 2 to Europe were in their
time sufficiently large to upset the trade balances of the countries
concerned. In recent years the payment of reparations has
been the greatest factor affecting the trade of Germany.
Non-commercial remittances by aliens in India are made
either through Money Orders and British Postal Orders or
by means of other financial documents. Naturally, provision
must be made in foreign countries for the cashing of these
documents in either of the two ways or by both : by exporting
additional goods and/or by reducing the imports. Therefore,
non-commercial transactions which involve payments by
Indians to persons abroad affect the commodity balance of the
trade of India, either by increasing the exports or by reducing
the imports or in both ways simultaneously. In any case, they
1 C. F. Speare estimates $250,000,000 as the amount remitted by
the foreign immigrants in United States of America during the year
1907. North American Review, January 1908, p. 109.
* F. W. Taussig, International Trade, p. 322.
68 India's Balance of Indebtedness
bring about an excess of exports. Similarly, non-commercial
transactions involving payments to India from foreign countries
increase the imports or decrease the exports and thus bring
about an excess of imports over exports. Settlers' effects,
however, which move with their owners without money being
used at any stage, in no way affect the balance of international
credits and debits. We have already made allowance for this
factor in dealing with the commodity balance of trade. There-
fore the items which we have to evaluate in striking the
balance of non-commercial transactions for India are: first,
monetary capital brought in by immigrants and taken out
by emigrants ; second, remittances by aliens in India to their
relatives in the Home Country and by Indians abroad to their
relatives at home, remittances by Indians to their relations
abroad and conversely by aliens to their people here, and,
third, remittances of pensions and allowances payable abroad.
IMMIGRANTS' CAPITAL
Statistical information about immigration to India is extremely
scanty, it is non-existent so far as emigration is concerned.
However, some details about the movement of coolies from
India to various colonies and back are available, and it is
possible to form a rough estimate of the capital brought in
by coolie immigrants.
The "colonial emigration" 1 from India during the period
of our study was controlled by legislation. It was based on
what is known as the "indenture" system. According to this
system the emigrating Indian labourer in consideration for a
wage and the cost of his passage undertook to leave India
1 Under the Emigration Act XXI of 1883 an Indian emigrant is
one who goes by sea under contract to labour for hire to some country
other than Ceylon and the Straits Settlements. These countries are
excepted on account of their proximity and of the similarity of their
general conditions to those of India. The emigration under this Act
is in other terms styled "Colonial Emigrations." Moral and Material
Progress Report, 1890-92, p. 209.
Balance of Non-Commercial Transactions 69
and serve his master in a distant colony for a fixed period which
varied from one month to five years. On the termination of
his contract he had the option to renew the contract or to
settle in the colony and work as he pleased, or to return to his
motherland at the expense of the colony which imported him. 1
In this fashion the employer could secure a sufficient supply
of labour for a maximum period at a minimum cost. The
labourer who agreed to the terms of the contract was generally
very poor, having no resources in India even for bare main-
tenance. From the time of his recruitment all his expenses
were borne by the importing colony,* where on landing he
was entitled to receive a regular wage. Under these circum-
stances it is difficult to suppose that the labourers emigrating
from India to colonies according to the indenture system carried
any substantial amount of monetary capital with them.
In the case of immigrants the situation was altogether
different. They were the emigrant labourers who had stayed
in a colony for some years and earned regular wages. Moreover,
as we have said before, the emigrants at the expiration of their
agreement were free to take up other employments. Many of
them settled in the colonies permanently, acquired land or
engaged in retail trading and miscellaneous occupations.3
1 National Bureau of Economic Research, International Migrations,
vol. ii, p. 597.
* Moral and Material Progress Report, 1901-2, p. 320.
3 Census of India, 1911, p. 97. In Natal there has been a great
deal of permanent settlement, and of the total number of Indians
enumerated there nearly half were born in the colony. Many of these
have forgotten their native language and now talk only English. But
it is in Mauritius that the process of colonization has made most
headway. The introduction of Indian coolies to work the sugar
plantations dates from the emancipation of the slaves, three-quarters
of a century ago, and from that time onwards many of the coolies
who have gone there have made the island their permanent home.
Though it now contains only 35,000 persons who were born in India,
the total number of Indians is 258,000, or about 70 per cent of the
whole population. A large part of the land is now owned by Indians and
they are dominant in commercial, agricultural, and domestic callings.
yo India's Balance of Indebtedness
Available evidence goes to prove that those who stayed on in
this manner prospered and did much better in life than they
could have done by returning to India. The figures in Table XI
show the total resident Indian population indentured and
free in the chief labour-importing colonies, and their savings
per head during the years 1900-1 and 1910-11.
TABLE XI*
RESIDENT INDIAN EMIGRANTS IN THE CHIEF LABOUR
COLONIES AND THEIR SAVINGS PER HEAD
IMPORTING
Colony
Indian
Population
in 1900-01
Savings
per Head
in 1900-01
Rs. as. ps.
Indian
Population
in 1910-11
Savings
per Plead
in 1910-11
Rs. as. ps.
British Guiana. .
1,32,984
33
6
Trinidad
.. 85,615
17
12
O
1,07,433
17
H
o
Mauritius
. . 2,65,163
13
4
O
2,59,
975
89
o
o
Natal . .
. . 65,925
23
3
O
1,08,
694
16
6
o
Fiji
. . 15,368
19
13
O
39,
3H
6
3
Jamaica
.. 15,
278
23
H
15,
415
80
4
o
Surinam
.. 18,
ooo
26
3
O
27,
358
19
5
Demerara
- r >25,
875
21
10
O
St. Lucia
I,
20O
23
13
Martinique
3>
764
O
8
Guadeloupe
. 15,
276
2
12
Total .. 6,11,464 . 6,91,173
* Compiled from the Moral and Material Progress Reports, ^1*901-2
and 1911-12.
The figures of savings are necessarily incomplete and they are
not all comparable with one another. In all cases they include
bank deposits and amounts remitted by emigrants to India,
but the Fiji figures for savings banks represent only deposits
made during the year, while in other cases the total amount
held in deposit in the banks is shown. For the year 1900-1
the value of landed and other property in the possession of
emigrants is also' included in the figures of savings per head,
while for the year 1910-11 it is included only in the figures
Balance of Non-Comniercial Transactions 71
for British Guiana, Mauritius, Jamaica, and Surinam. The
residents of British Guiana, Mauritius, Natal, Jamaica, and
Surinam seem to have been better off than others. Natives of
India and their descendants constituted 70 per cent of the total
population of Mauritius in 1910-11 and owned landed pro-
perty to the estimated value of Rs. i8,ooo,ooo. x In regard to
remittances made to India by money orders the emigrant
population of Natal easily stands first. The amount remitted
from that colony in the year 1911 was about Rs. 1,050,000, or
on an average Rs. 9-6-0 for every resident Indian. Remittances
from Fiji averaged about Rs. 1-3-0, while in the case of other
colonies the average was less than 12 annas per head.
These residents, when they returned to India, could
naturally be expected to have brought an appreciable amount of
monetary capital. Even the regular wage-earners who turned
back to the Mother Country soon after the expiration of their
contracts, which extended from five yearsjo ten years, may be
credited with large savings. Figures for the monetary capital
brought in by the immigrant coolies landing at Calcutta can
be gleaned from the Moral and Material Progress reports.
From these data we work out the per capita amount of monetary
capital brought in by the coolies arriving at Calcutta and
apply their average to the rest of their kind. There cannot
be any serious objection to this procedure. First, because
since the year 1904-5 the coolie emigrants landing at Calcutta
formed a large percentage of total coolie emigrants returning
to India, Secondly, the emigrant labourers landing at Calcutta,
Bombay, or Madras did not come from any one colony but
from all the colonies, and hence the average per capita amount
of monetary capital brought in by the emigrants at any of these
ports will be largely representative of the rest. The estimates
prepared on this basis for the whole period under study are
presented in Table XII.
The figures for monetary capital brought into India as far as
1 Moral and Material Progress Report, 1911-12, p. 374.
72 India s Balance of Indebtedness
they go may be approximately correct. But colonial immi-
gration is only a fraction of total immigration into India from
the outside world. Similarly with emigration. Again, no data
about the total annual volume of immigration and emigration
TABLE XII*
CAPITAL BROUGHT IN BY THE COOLIE IMMIGRANTS
Year
1898-99
i 899-00
1900-01
1901-02
i 902-03
1903-04
1904-05
1905-06
1906-07
1907-08
1908-09
1909-10
1910-11
1911-12
1912-13
I9I3-H
* Compiled from the Moral and Material Progress Reports.
f All the immigrants did not bring savings to India.
J See Appendix II for the per capita savings brought by immigrants
from different colonies. In calculating the per capita brought in by
these immigrants no account has been taken of those immigrants
who did not bring in any savings.
are available. The census reports record the number of immi-
grants arriving in India during the census years, but say nothing
about emigration. The data are so scanty that even indirect
methods cannot be used to ascertain the inflow and outflow of
population every year. Still, in general terms it can be said that
a majority of immigrants into India come from Asiatic countries,
Per Capita
Total Capital
Amount of
Brought in by
Coolie
Capital
the Coolie
Immigrants^
Brought in\
Immigrants
Rs.
Rs.
5,689
129
7,33,983
9,484
159
15,08,061
7,006
139
9,62,992
10,623
210
22,65,830
12,757
183
23,04,123
n,673
167
19,48,264
6,341
174
11,05,851
6,945
173
11,96,006
8,i97
1 60
13,08,910
6,774
177
12,03,474
7,918
1 80
14,19,780
6,909
171
11,82,528
5,788
154
8,91,394
155
4,641
197
12,15,047
5>28 4
1 80
9,55,440
Balance of Non-Commercial Transactions 73
especially from across the Nepal Frontier. Of the Nepalese
enumerated in India in the year 1911 a considerable number
were sepoys in the Army, and in military police battalions, and
their dependants. Many of them were engaged in breeding
buffaloes, making ghee, or working as sawyers in the Govern-
ment forests of Assam. 1 Most of the Chinese immigrants,
whose number is swelling every year, are found in Burma,
TABLE XIII
IMMIGRANTS FROM OUTSIDE INDIA AT THE CENSUS YEARS
1891, 1901, AND 1911
IMMIGRANTS FROM
I
II
III
IV
Other
Other
Contiguous
Asiatic
United
European
Year
Countries
Countries
Kingdom
Countries
1891
4,60,616
60,988
97,921
7,148
1901
3,65,441
160,708
96,653
7,930
1911
3,80,135
124,978
122,919
9,049
IMMIGRANTS
FROM
V
VI
VII
VIII
Year
America
Africa
Australia
Total
1891
2,325
n,565
503
6,41,066
1901
2,069
8,293
646
6,41,740
I9II
2,760
10,270
1,267
6,51,378
where they are in demand as shoe-makers and carpenters.
Immigrants from Europe and America find remunerative jobs
ready for them in India. In the year 1911 the total number of
immigrants recorded from outside Asia was 146,265. Of these
131,968 came from Europe, the United Kingdom alone
claiming 122,919. Of the British-born, 77,626 were serving in
the Army and the rest were absorbed by railways and industrial
concerns. 2 The number of immigrants in India at the three
census years 1891, 1901, and 1911 is represented in Table XIII
according to the country of immigration.
1 Census of India, Report, igu, vol. i, p. 96. * Ibid., p. 97.
74 Indicts Balance of Indebtedness
A cursory glance at these figures brings two important facts
to our notice. In the first place immigrants from the United
Kingdom during the decade 1901 to 1911 showed a large
increase and, secondly, the figure for total immigrants was
more or less constant for all the three years. These data,
however, are extremely scrappy to form the basis of an esti-
mate of the annual flow of immigration. So far as the volume
of emigration is concerned even guesswork is not possible.
Moreover, we could not find any reference anywhere to the
probable amount of monetary capital brought in and taken out
by immigrants and emigrants respectively. Obviously in the
absence of such fundamental data it is impossible to calculate
even approximately the amounts of monetary capital brought
in and taken out by immigrants and emigrants respectively.
But on general grounds it can be stated that as most of the
immigrants come to India in search of employment, and as
most of the emigrants are immigrants returning to their home
countries after a period of highly remunerative service in
India, the net balance on account of the movements of monetary
capital accompanying the migrants in either direction will be
a debit item. This is especially the case with European immi-
gration and emigration, which is most important to India so
far as the transfer of monetary capital is concerned.
MEANS OF REMITTANCE FROM INDIA
Even though we have not been able to ascertain separately
the net debit or credit balance on account of the monetary
capital brought in and taken out by immigrants and emigrants,
it is possible to calculate approximately the balance of non-
commercial transactions as a whole. The transfer of money
from one country to another, whether it be the capital of a
departing immigrant or emigrant or the remittance by a
resident of one country to his friends or relatives in the other,
as effected either through a bank or by a money order. In the
Balance of Non-Commercial Transactions 75
case of India there is a third way of sending money and that
is by the purchase of British postal orders. Remittances of
pensions and allowances payable abroad are effected by means
of Council Bills. The illiterate or otherwise ignorant immi-
grants from the contiguous Asiatic countries and the Indian
emigrants to the colonies for the most part make use of the
facilities afforded by the Post Office. Foreign money orders
to and from the United Kingdom, most of the British colonies
and possessions, foreign European countries, and most of
their colonies and possessions, and Egypt are issued in sterling,
payments being made by the remitters and to the payees in
India at the rates of exchange fixed by the Post Office from
time to time for this purpose. 1 On the other hand, European*
immigrants and their relatives at home effect remittances
through the British Exchange Banks and other foreign banks
having branches in India. Remittances to Indian students
studying in the United Kingdom are also generally made in
this fashion. If we take account of all the media of transfer
issued and paid in India by these agencies the resultant will
closely represent the net balance of non-commercial transactions
for India.
FOREIGN MONEY-ORDER TRANSACTIONS
There are available for India statistics of postal money orders
issued in India and payable in other countries. All these
money orders, however, do not represent non-commercial
remittances from India. About 50 per cent of the amount goes
to cover small business transactions. This figure is based on
the value of articles imported by post in the year 1898-99 as
a percentage of the total amount of postal money orders issued
in India and payable abroad during the same year. The actual
percentage works out a little higher. 2 But we have made some
1 Annual Report of the Posts and Telegraphs, 1893-94, p. 17.
a " In 1898-99 the value of articles imported by post was
Rs. 33,42,000, while the value of foreign orders issued and British
76 India's Balance of Indebtedness
allowance for the transactions settled through the Exchange
Banks which were just beginning to make headway. We further
assume that this percentage remained more or less constant
during the period 1898-99 to 1913-14. Admittedly these
assumptions rest on a somewhat slender basis :
(i) In the first place the value of foreign money orders
issued in India increased at a very slow rate during
the period of our study. 1
(ii) Secondly, the number of European immigrants in
India increased by over 30,000 during the decade
1901 to 1911.
(iii) Thirdly, the value of articles imported by post also
increased fast, so much so that it over-balanced the
value of foreign money orders issued and British
Postal Orders purchased every year since 1905.*
(iv) Lastly, the business of the Exchange Banks in regard
to private remittances showed a remarkable progress
during the period.
The slow rise in the value of foreign money orders issued
in India, in spite of an addition of 30,000 to the number
of European immigrants residing in India, to whom a large
share of the total remittances from India is usually credited,
indicates that the Post Office did not find favour with them as
an agency for the transfer of money. On the other hand, the
progressive remittance business of the Exchange Banks simul-
taneously with the increase of European immigrants and the
overwhelming increase in the total value of articles imported
by post suggests that the remittances by the immigrants and
postal orders purchased was Rs. 49,00,000. Therefore the actual
percentage of commercial remittances to the total value of foreign
money orders issued to British postal orders purchased in India comes
to sixty-seven.
' Vide Table XIV.
a Review of the Trade of India> 1931-32.
Balance of Non-Commercial Transactions 77
the payments for the articles imported by post were made
through the Exchange Banks. Moreover, as we have already
stated, the postal money orders were a favourite means of
remittance with the illiterate and ignorant immigrants who
did not know the technicalities of the procedure of the Exchange
Banks. The earnings of this class were not very large and
hence the value of foreign money orders issued in India did
not show any substantial increase.
BRITISH POSTAL ORDERS
Money can also be transferred to countries outside India by
means of British postal orders. These orders are sold in India
at the Post Office for a small commission and can be remitted
to the United Kingdom and other British colonies where alone
they are payable. However, they were not very popular with
the people during the period of our study, nor were they en-
tirely non-commercial in nature. The percentage of the value
of commercial foreign money orders to the value of total
foreign money orders issued in India may be applied here
also. In addition, since October i, 1905, these orders were
made payable in India, and like inland money orders were
used for local remittances. 1 Therefore the value of such orders
paid in India, along with those remitted to settle commercial
transactions, must be deducted from the total value of orders
sold in India to arrive at the value of non-commercial remit-
tances effected through them. All the necessary information
on this account is available in the Annual Report of the Posts
and Telegraphs.
Just as in the case of foreign money orders issued in India
and British postal orders purchased a percentage of their
value has been attributed to commercial transactions already
accounted for in the commodity balance of trade, similarly
some allowance must be made for commercial remittances
in the case of foreign money orders payable in India. Here
1 Annual Report of the Posts and Telegraphs, 1905-6, p. 18.
78 India's Balance of Indebtedness
the allowance will be based on the actual percentage which
the value of articles exported from India by post bore to the
total value of foreign money orders payable in India. First,
because the values of individual parcels exported by post
were small enough to be paid by money orders and, secondly,
their total value was always smaller than the value of foreign
money orders payable in India. In the case of foreign money
orders issued in India and articles imported by post both
these conditions were exactly opposite. 1 The value of com-
mercial money orders calculated in this manner amounted
approximately to 30 per cent of the total value of foreign
money orders payable in India, 2 which will have to be sub-
tracted from the latter in calculating the balance of non-
commercial transactions.
THROUGH FOREIGN MONEY ORDERS
Lastly, before arriving at the final balance of non-commercial
money-order transactions we have to deal with the value of
"through foreign money orders/* "Through foreign money
orders" are defined as money orders issued by one foreign
1 Jewellery, precious stones, gold and silver thread, cigarettes and
cinematograph films are the most important articles imported in India
by post. The large amounts payable by India on account of these
articles can be judged from the value of diamonds alone imported
by post for the following years :
Rs.
1920-21 = 14,60,000
1921-22 = 15,00,000
1922-23 = 132,00,000
League of Nations' Memorandum on Balance of Payments and
Foreign Trade Balances y 1910-23, vol. ii, p. 319.
2 Foreign Money Articles Percentage
Orders Payable Exported of
in India by Post II to I
Year 1 II Approximate
lakhs lakhs
1898 89 27 30
1908 192 48 30
1913 374 112 30
Balance of Non-Commercial Transactions 79
country for payment in another foreign country, the payment
being made through India as an intermediary. 1 When these
money orders are received by India from the foreign country
of issue they are regarded as equivalent to inward foreign
money orders. The credits to India on this account are the
amount of the money orders plus a half per cent commission,
and are put under the heading of foreign money orders paid.
When the sums are sent by India to foreign countries of pay-
ment, they are regarded as equivalent to outward foreign
money orders. The debits against India on this account are
the amounts of the money orders minus a commission. The
sums are put under the heading of foreign money orders
issued.
From the definition of "through foreign money orders"
and the manner in which their accounts are recorded, it follows
that the difference between the sums credited and debited to
India on account of "through foreign money orders'* should
be equal to the one-half per cent commission on the inward
"through foreign money orders/* plus a varying commission
on the outward "through foreign money orders/* 2 In fact,
however, the difference between the two as calculated from
the Statistical Abstract for British India (Postal Tables) and
the Annual Postal Reports is much larger than can possibly
be explained on this hypothesis.3 For instance, the value of
1 Posts and Telegraphs Manual^ vol. 6, Appendix C, p. 517.
* Ibid., p. 579.
3 The difference is calculated as follows :
Neither the Statistical Abstracts nor the Postal Reports give separate
figures for through foreign money orders. The Postal Reports even
do not mention the term. The Statistical Abstracts from 1921-22
to date, however, refer to them indirectly. The figures for foreign
money orders paid and issued given in the Abstracts are reference
to footnotes taken to exclude through foreign money orders. Hence
up to 1920-21 the figures given in the Statistical Abstracts and in
the Annual Postal Reports tally. But from 1921-22 they too differ.
Therefore, if on the basis of this evidence as well as of an absence
of indications to the contrary, we assume that the figures in the
8o India's Balance of Indebtedness
"through foreign money orders" issued by India during the
year 1921-22 was Rs. 4,22,172, while that of the "through
foreign money orders" paid to India was Rs. 7,52,153. The
difference of Rs. 3,29,981 obviously cannot be explained as
due to commission charges, which form only a very small
percentage of the total value of "through foreign money
orders" issued and paid in India. 1 We have not as yet been
able to find any explanation of this discrepancy between the
recorded statistics and our theoretic calculations, which are
apparently based on correct principles. However, since the
figures of "through foreign money orders" involved in our
calculations are insignificant relatively to the total trade of
India we have thought it proper to ignore them.
Table XIV represents the balance of non-commercial
remittances effected by means of foreign money orders and
British postal orders.
REMITTANCES THROUGH EXCHANGE BANES
As said before, remittances are also made through banks.
Naturally their value will be included in this account only so
far as they relate to non-commercial transactions. But infor-
Annual Postal Reports include those for all types of foreign money
orders including through foreign money orders then for the years
1921-22 onward the difference between the figures in the Postal
Reports and the Statistical Abstracts should be a measure of the
amounts of through foreign money orders.
1 The wide gap between the sums credited and debited to India
on account of "through foreign money orders'* can be seen from the
following figures:
Values in lakhs of rupees
Year Credits Debits
1921-22 7 4
1922-23 3 3
1923-24 3 3
1924-25 2 8
1925-26 3 8
1926-27 5 i 8
1927-28 9 17
Balance of Non-Commercial Transactions 81
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Balance of Non-Commercial Transactions 83
mation about such remittances is extremely scanty to enable
us to form any independent estimate. Mr. H. F. Howard,
formerly the Controller of Currency in India, has, however,
prepared a rough estimate of the debits to India on this account. 1
According to one of the Exchange Banks the net debit balance
to India on account of non-commercial remittances to and
from India made through banks is about Rs. 15,00,000-
Rs. 18,00,000 per mensem. Howard assumes the smaller
amount at the beginning of the period of our study and
gradually increases it to the higher of these figures at the end.
In the absence of any other estimate or the necessary data
we assume these figures to be approximately correct and
adopt them in our study.
Information about remittances of pensions and allowances
has been taken from the Statistical Abstracts for British India.
The total balance of non-commercial remittances effected
through banks and by means of foreign money orders and
British postal orders is presented in Table XV.
1 Report on the Operations of the Currency Department, the Move-
ment of Funds, and on the Resource Operations of the Government of
India for the year 1913-14, Appendix I, p. 53.
CHAPTER IV
INDIA'S BALANCE OF INDEBTEDNESS
THE difference between all the credit and debit obligations of
India, immediate as well as deferred, represents her balance
of indebtedness. It is equivalent to the difference between her
foreign borrowings and foreign loans. So far we have taken
into account India's international credits and debits on account
of commodity transactions, service transactions excepting
interest payments and non-commercial transactions. But
there are certain items which could not be appropriately in-
cluded under either of these categories and which, accordingly,
have escaped reckoning. To ascertain the balance of indebted-
ness which represents the difference between all the credits
and all the debits, those items in our international balance
sheet which have escaped computation so far will be considered
here in the following order:
Councils and Reverse Councils.
Cash Balances and Reserves of the Secretary of State.
Railway Annuities and Sinking Fund.
India Bills.
Movement of Securities.
Miscellaneous Deposits and Remittances.
Interest Payments.
COUNCILS AND REVERSE COUNCILS
Councils, or the Council Bills as they were properly termed,
were the bills drawn by the Secretary of State on India. They
were sold in London for sterling and are generally cashed at
the Indian treasuries in rupees. In certain cases, when they were
specifically drawn either against the Paper Currency Reserve
or the Gold Standard Reserve, they were paid from the portions
India's Balance of Indebtedness 85
of these reserves kept in India. Reverse Councils, on the other
hand, were bills drawn on the Secretary of State for India
and payable in London in sterling.
Normally, the commodity balance of trade is favourable to
India. Every year she has to receive payments from abroad
for the surplus of her exports over imports. On the contrary,
the Secretary of State for India has to make payments in
London on account of Home Charges. These payments are
to be made in sterling while the Indian Revenue to which they
are charged is collected in rupees. Therefore, taking advantage
of the normally favourable commodity balance of trade and
the consequent demand for bills on India, the Secretary of
State sold " Councils" and got command over funds in London
to meet his liabilities. The bills were offered in London for
tender at the Bank of England every Wednesday morning and
there was a reserve price below which no tender was accepted.
The purchasers remitted the bills to India, where on pre-
sentation to the Treasury they were cashed out of the accumu-
lated surplus of rupees, and the claims of the Indian exporters
were satisfied. Whenever the Indian bank-rate was high, the
Secretary of State for India sold " Telegraphic Transfers"
instead of Council Bills. By means of these Telegraphic Trans-
fers rupees could be obtained in India almost as soon as the
sovereigns were paid into the Secretary of State's account at
the Bank of England. In effect, therefore, the "Council Bills"
and the " Telegraphic Transfers" were the means of trans-
ferring funds from India to London and vice versa, which
saved the Government of India the extra expenditure on the
export of gold to London, so as to purchase the amount of
sterling necessary to honour their debit obligations in Great
Britain. They also brought a small commission to the Secretary
of State for India for dealing in foreign exchange, which other-
wise would have been secured by the London banks.
Till the year 1900 the volume of "Council Bills" drawn by
:he Secretary of State was mainly governed by the amount
86 Indicts Balance of Indebtedness
required to defray the Home Charges. Since 1900, however,
the functions of the Council Bill system were enlarged and for
the rest of the period of our study it played a very important
part in the maintenance of the Gold Exchange Standard. 1
Sales of Council Bills during this period were determined by
the necessity of maintaining the is. 4d. ratio.
How are these Council Bills to be accounted in the balance
sheet of India's international transactions? Are they to be
considered as debits because they represent a payment for the
surplus of our exports, or are they to be considered as credits
because they represent a transfer of funds from India to
London? As we have already said, Council Bills are only
a means of transmitting funds. However, they perform a
double transaction. When the Councils are sold by the Secre-
tary of State the proceeds of the sale represent credits to India.
But when the bills are cashed through the Treasury in India
they become a debit item. If, therefore, the Council Bills are
to be included in the balance of India's international trans-
actions they may be considered both as credits and debits or
they may be excluded altogether. The following passage from
the Report of the Controller of Currency, 1913-14, is
enlightening on this point:
The remittances which the Indian Government have to make
to England to meet their liabilities in the United Kingdom on
account of interest and other charges are usually effected by the
sale by the Secretary of State of bills and telegraphic transfers on
India. These bills, etc., represent two transactions, namely, a
remittance to England by the Government of India and a corre-
sponding remittance to India by the purchaser of bills. The
relationship between these remittances and the other private trans-
actions can be represented in the form of a simple equation :
C - D + S,
where C represents the private credits on account of exports, etc.,
1 J. M. Keynes, Indian Currency and Finance, p. 106.
Indicts Balance of Indebtedness 87
D the debits including imports, etc., and S the Secretary of State's
drawings by which payment is made for the balance of credits not
set off by the imports of merchandise, specie, etc. In a similar
equation to show the Government transactions, S representing an
export of funds from their point of view may appear on the other
side of the account and we should have
where C represents credits and D the debits on account of Govern-
ment. The two equations can obviously be combined into one, thus:
C + c4 S = D + d + S
or eliminating S,
C + c = D + d.
That is to say, the Government and private transactions can be
presented in a single equation, and the Secretary of State's drawings,
which "when this is done represent merely a book transaction, can
be eliminated from the joint account.
The Reverse Councils are sold in India and are payable in
sterling in London. This process, which is the opposite of that
involved by the Council Bills, gives them their name. However,
in their effect on the balance of our international transactions
they are on a par with the Council Bills.
CASH BALANCES AND RESERVES OF THE SECRETARY OF STATE
The discussion about the real nature of transactions effected
by means of the Council Bills leads us to the consideration of
the credits and debits of India managed by the Secretary of
State. His balance sheet in any year includes: 1
Receipts
(i) Net debt incurred.
(ii) Council Bills.
(iii) Gold Remittances from India.
(iv) Other miscellaneous deposits and remittances.
(v) Opening Balance.
1 See footnote on next page.
88 India's Balance of Indebtedness
Disbursements
(i) Net Home Charges payable.
(ii) Capital expenditure in England,
(iii) Reverse Councils,
(iv) Purchase of silver.
(v) Closing balance.
The Council Bills and the Reverse Councils we are alto-
gether omitting from the balance of India's international
transactions because they represent two opposite transactions.
The rest of the credit and debit items enumerated above,
except the withdrawals and additions to the Treasury and
other reserves of the Secretary of State, are considered else-
where in the course of this study. Now, therefore, the point
is whether these withdrawals and additions to the balances of
the Secretary of State be included or not in the balance sheet
of India's international transactions, and if they are to be
NOTE TO PAGE 87. J. M. Keynes arranges the balance sheet of the
Secretary of State as follows :
PAYMENTS
Home charges x
Gold "Earmarked/* or securities bought for Currency Reserve
in London y
Cost of silver profit on coinage credited to Gold Standard
Reserve in London z
Expenditure on stores in London for capital purposes in India v
Transfer of cash balances from India to London . . . w
Total payments = x y z v w.
RECEIPTS
Council Bills cashed from balances in India x u v w
Council Bills cashed from rupees in Cur-
rency Reserve in India . . . . y
Council Bills cashed from new coinage . z
Total Council Bills drawn . . . . x y z u v w
Net Capital Borrowings . . . . u
Total Receipts in London =x+y+z+vw
Indicts Balance of Indebtedness 89
included what is their significance. In taking account of India's
international credits we have considered all the remittances
from India to the Secretary of State on Government account
as credits. However, such remittances, whether made in gold
or by means of the Secretary of State's drawings, have per se
no more effect on the international transactions of India than
the transfer of funds from one Treasury in India to another.
"What is material is the extent to which they have been
actually employed in meeting debits raised against the Govern-
ment of India in England, and how far any portion of them is
still in hand." 1 Accordingly, the part of the remittances which
remains after all the debits in England are paid for and which
consequently swells the reserves and the cash balances of the
Secretary of State cannot be considered as a credit to India.
Therefore the inclusion of the entire amount of Government
remittances under "credits" has unduly increased their volume
to the extent that they added to the reserves and the cash
balances of the Government in England. As a set-off against
this over-estimate the annual net increase in the reserves and
the cash balances of the Secretary of State will be considered
as a debit to India. On the other hand, when the remittances
of the Government and the loans raised in England are not
sufficient to pay off the debits of the Secretary of State, he
has to draw upon his reserves and the cash balances. Naturally,
to the extent that he draws upon these reserves his credits
increase. These credits, however, are so far left unaccounted
for, with the result that the total of our receipts on inter-
national account represents an under-estimate. It can be
corrected by adding the amount of annual net withdrawals
from the Secretary of State's reserves and cash balances to the
credit side of India's international transactions.
The credits and debits to India on account of alterations in
the Secretary of State's reserves and cash balances are pre-
sented in Table XVI.
1 Report on the Operations of the Currency Department) 1913-14, p. 50.
9
India's Balance of Indebtedness
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Indicts Balance of Indebtedness 91
RAILWAY ANNUITIES AND SINKING FUND
Payments on account of Railway Annuities and Sinking Fund
are in the nature of capital repayments. The first railways in
India, including some of the more important systems, were
constructed through the agency of foreign joint-stock com-
panies under contracts with the State. According to these
contracts the railway companies received a guarantee of 5 per
cent on their capital outlay with half the surplus profits besides,
while the State retained the option of purchasing the railways
after a certain period. Whenever opportunity to exercise this
right presented itself, it was readily taken up, with the result
that the State became the owner of Indian railways in course
of time. The purchases were effected under an arrangement
by which the bulk of the price was paid by annuities, a portion
of the balance being discharged by the creation of India Stock,
which was gradually to be cancelled by annual sinking-fund
purchases. For example, the contract with the East Indian
Railway came to an end in 1879. The Company's share was
valued at 125 per 100. Accordingly, its purchase price
amounted to 32,750,000, which is being paid by means of a
terminable annuity of 1,473,750 payable till I953. 1 In two
cases new company stock was issued in exchange for a portion
of the annuity. 2 The whole amount of these annuity and sinking-
fund charges are paid out of the railway revenues and as such
constitute a debit item in India's international transactions.
INDIA BILLS
To tide over a temporary period of inadequate receipts, the
Secretary of State for India borrows funds by means of India
Bills. Such borrowings are either redeemed or funded shortly
after their flotation. In either case the balance of India's
1 C. N. Vakil, Financial Developments in Modern India, p. 230.
* H. F. Howard, India and the Gold Standard, p. 83.
92 India's Balance of Indebtedness
international indebtedness is affected in reverse directions in
the years of flotation and redemption or funding respectively.
Therefore in the year of flotation such loans are considered
as credits to India and in the year of redemption or funding
they are considered as debits. Though the India Bills issued
and redeemed by the Secretary of State represent movements
of capital to and from India because they are very small and
because their effect on India's balance of indebtedness is can-
celled within a very short period of time, they are considered
here separately from the larger movements of capital considered
elsewhere.
MOVEMENT OF SECURITIES
In their effect on the balance of India's credits and debits
the private remittances of securities must be differentiated
from the remittances of money. 1 The money remitted from
India constitutes a debit item. But if somebody in India sells
an Indian security to a person residing in a foreign country
the transaction counts in the international trade as a means of
discharging an international liability. On the other hand, the
remittances of such securities to India from abroad create a
liability against her. This is equally true in the case of Indian
Government paper enfaced in India for payment of interest in
England and vice versa, subject to the qualification that if
an Englishman in India saves money and invests it in such
paper, and when returning to England gets the paper enfaced
and takes it with him, the transaction does not affect the
international account of the year one way or the other. Subse-
quently, however, when interest on such paper falls due a
debit arises against India. The net credits and debits on account
of the movement of Government securities are therefore
included in striking the balance of India's international
obligations.
1 H. F. Howard, op. cit., p. 83.
India's Balance of Indebtedness 93
MISCELLANEOUS DEPOSITS AND REMITTANCES
These include the unrecorded exports on Government account
and a number of adjustments with the Home and Colonial
Government on account of the postal department, etc., not
included in the "Home Charges." The shipment of stores in
vessels chartered by Government do not figure in the statistics
of Indian sea-borne trade as the vessels do not clear at the
Customs. "In this way during the South African War and the
China Expedition great quantities of material escaped record;
much of this having been sold to the British Government
represented a true commercial transaction affecting the balance
of trade. "* Credits to India on this account should have been
properly included under commodity transactions. But in the
absence of separate figures it could not be done. However,
H. P. Howard has prepared an estimate of the value of such
exports along with the credits qnd debits to India on account
of the postal department, etc. for money-order remittances
sent to India from South Africa and elsewhere, which are
honoured by the Indian Government in India, that Government
being paid in London. As the credits and debits to India on
account of the foreign money-order remittances have already
been considered in the balance of non-commercial transactions,
the adjustments with the Home Government on that account
need not be considered again. Besides, the value of such
adjustments is very small. Therefore, for the sake of this
study, we accept H. F. Howard's estimate of the Miscellaneous
Deposits and Remittances to be credited or debited to India
without any allowance.
Table XVII represents the balance of India's credits and
debits on account of railway annuities, India Bills, Movement
of Securities, and the Miscellaneous Deposits and Remittances.
1 Report on the Operations of the Currency Department, 1913-14*
p. 48.
94
India's Balance of Indebtedness
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India's Balance of Indebtedness 95
PRELIMINARY BALANCE OF INTERNATIONAL INDEBTEDNESS
We have now estimated the value of all classes of India's
international transactions except interest payments on the
amount of foreign capital invested in the country. The balance
of India's international indebtedness in each year represents
the net borrowing or lending of capital or the difference
between its borrowings and loans. During the pre-war period
the proverbially shy Indian capital is not known to have been
seeking investment in foreign countries. Hence, if we tabulate
all the items in our international transactions so far con-
sidered and strike balances between the credit and the debit
items for each year during 1898-99 to 1913-14, the resulting
figures would represent for each year the amount of foreign
capital invested in India in that year minus the interest pay-
ments by India in that year on the total amount of foreign
capital invested in India at the end of the preceding year. The
results of this calculation are given in Table XVIII.
INTEREST PAYMENTS BY INDIA
The preliminary balance of indebtedness presented in
Table XVIII represents the annual foreign borrowings of
India minus the interest payments. If, therefore, we can reach
an estimate of the interest charges payable by India every year
during the period of our study it is quite possible to ascertain
the actual amount of our foreign borrowings. To form an
estimate of the interest charges payable by India, information
on two points is necessary. Firstly, the total amount of foreign
interest-bearing capital invested in India at the beginning of
the period, i.e. at the beginning of the year 1898-99. Secondly,
the rate of interest paid on the foreign capital invested in
India before 1898-99 and the rates of interest paid for the
subsequent years of our period. The sterling debt of India,
which represents the foreign capital imported on Government
account, stood at Rs. 18,490 lakhs in the beginning of the
96
India's Balance of Indebtedness
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India's Balance of Indebtedness 97
year 1898-99, interest payments on which amounted to
Rs. 582 lakhs annually. The total amount of non- Government
borrowings at the beginning of the period was Rs. 20,863
lakhs, including private capital. 1
About the rate of interest charged on the non- Government
borrowings of India no reliable data are available. R. A.
Lehfeldt, 2 from a careful study of the primary records, obtained
the following average rates of interest at which "large"3
colonial fixed income stocks were issued in Great Britain.
AVERAGE RATE OF RETURN ON LARGE COLONIAL INVESTMENTS ISSUED
TO PAY A FIXED RATE OF INTEREST
Year Per cent Year Per cent Year Per cent
1899 3-27 1904 3-78 1909 3-96
1900 3-20 1905 3-78 1910 4-19
1901 3-40 1906 3-85 1911 4-03
1902 3-21 1907 3-99 1912 4-30
1903 3'2i 1908 4-04 1913 4-44
These averages relate to bond and preferred stock flota-
tions, but do not include common stock issues. Lehfeldt,
1 According to H. F. Howard's estimate the amount of British
capital publicly invested in India on non- Government account was
Rs. 21,150 lakhs at the end of 1910. Subtracting from this Rs. 8,653
lakhs, the amount of capital publicly invested in India from 1898 to
1910, we get Rs. 12,497 as the total amount of capital publicly invested
in India at the end of 1897-98. According to Edgar Crammond the
total British private investments abroad amounted to 27 per cent of
its public investments in Government and non- Government securi-
ties. Taking this percentage to be true in the case of India we get
Rs. 8,366 lakhs 27 per cent of Rs. 30,897 lakhs the total of British public
investments in India at the end of 1897-98 as the total amount of
foreign capital privately invested in India at the end of 1897-98.
Hence the total of foreign non- Government public capital and private
capital invested in India at the beginning of the period of our study
is calculated to be Rs. 20,863 lakhs.
R. A. Lehfeldt, "The Rate of Interest on British and Foreign
Investments/' 76. Journal of the Royal Statistical Society, 1912-13.
3 Issues of cash value exceeding 900,000.
G
98 India's Balance of Indebtedness
however, discovered in the course of his study that common
stock issues were only 10 per cent of the total British invest-
ments in large issues and that the percentage was lower still
if only the investments outside Great Britain were taken into
account. Hence the accuracy of these averages as far as they
go suffers only slightly by the exclusion of common stock
issues. In the year 1902 the average rate of return on large
fixed-income Indian Stock was 2-95 per cent, lower than the
average of all colonial fixed-income issues by 0-26 per cent.
This suggests that the average rates of interest on colonial
fixed-income issues obtained by Lehfeldt are a little higher
than what they might have been for India alone. But as against
this, there is the consideration that the average rate of interest
on India Stock represents an average of the rates of interest
on Government and non- Government borrowings. Govern-
ment loans, however, are floated at lower rates of interest than
the non-Government loans and, as such, the average rates on
colonial fixed-income issues may approximately represent the
rates charged on Indian non- Government issues. In the
absence of better information, we ignore the fact that according
to Lehfeldt the Indian non- Government issues were for the
most part of the "medium" 1 category, while the averages of
rates of interest quoted above refer to "large" issues and make
use of them to estimate the interest charges payable on the
foreign non- Government borrowings of India after 1898-99.
Similarly, though Lehfeldt's average rates of interest are
higher than the rates at which Government loans were raised
in London, to facilitate the use of the method described in the
following paragraph for ascertaining India's balance of in-
debtedness, we apply them also to the Government borrowings
after 1898-99. Allowance for the error resulting from the
application of higher rates of interest will be made in the
next chapter. Taking into consideration that the interest rates
were at an unusually low level in the last decade of the nine-
1 Issues whose cash value was between 100,000 and 900,000.
India's Balance of Indebtedness 99
teenth century, we take 3 per cent to be the approximate rate
of interest paid by India on the total amount of her non-
Government borrowings effected prior to 1 898-99.*
At 3 per cent the interest paid by India on Rs. 20,863 lakhs,
the total of her non- Government borrowings in the beginning
of 1898-99, amounted to Rs. 625 lakhs. In the same year the
amount of interest charges paid on Government account was
Rs. 582 lakhs. As against this, India received a small sum of
Rs, 4 lakhs on the investments of the Secretary of State's
reserves and cash balances in London. Therefore the total of
net interest charges paid by India in 1898-99 works out at
Rs. 1,207 lakhs. Table XVIII represents India's balance of
indebtedness for each year, but with interest payments un-
accounted for. Subtraction of the preliminary credit balance
of India in 1898-99 from the interest payments by India for
that year will as a result give us the amount of foreign capital
invested in India in that year. In the calculation of interest
payments for each subsequent year there must be included
the interest on foreign capital invested in India from the
beginning of 1898-99 to the end of the year preceding. The
"net" 2 investment of foreign capital in India in each year
during the period of our study can then be ascertained by
adding as debits the net interest payments by India during
the corresponding year to the preliminary balances of indebted-
ness worked out in Table XVIII.
The annual net interest payments by India and the annual
1 In the year 1898 the average rate of interest earned by large
Colonial fixed-income issues was 3 07 per cent. However, the course
of interest was declining until the middle of the last decade of the
nineteenth century. Therefore the interest earned by the investments
made prior to 1898 can be reasonably expected to be lower than
3*07 per cent. We have taken it exactly at three for the sake of
convenience.
Cf. Viner's Canada's Balance of International Indebtedness , 1900- rj,
p. 99.
a I.e. the excess of new investments over liquidation of old
investments.
100
India's Balance of Indebtedness
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India's Balance of Indebtedness 101
net investments of foreign capital in India as calculated by
the method explained in the preceding paragraph are sum-
marized in Table XIX.
In calculating the inteiest payments we have used the figures
BALANCE
TABLE XX
OF SERVICE TRANSACTIONS
(In lakhs of rupees)
Insurance, Balance
Banking, of Service
Freight
and
Transactions
Payment
Other
Net (I + II -Mil
by
Minor
Home Interest
+ IV)
Year
India*
Charges^
Charges J Paymen ts
(Debit)
I
II
III IV
V
1898-99
392
198
233
,203
2,026
i 899-00
457
230
217
,213
2,117
1900-01
479
248
206
,251
2,184
1901-02
570
249
87
,295
2,201
1902-03
572
247
231
,320
2,370
1903-04
559
291
184
,34i
2,375
1904-05
572
316
171
,372
2,431
1905-06
659
334
144
,406
2,543
906-07
476
362
172
,505
2,515
1907-08
582
395
183
,568
2,728
1908-09
687
357
226
,695
2,965
1909-10
572
386
204
,729
2,891
1910-11
554
425
222
,829
3,030
1911-12
683
461
218
,825
3,187
1912-13
903
414
217 1,893
3,427
I9I3-H
1,030
423
22O 1,964
3,637
*
Supra, Table
VII.
t Supra, Table VIII.
t
Supra, Table
IX.
Supra, Table XIX.
published in the Financial Statistics of British India for interest
charges on the total amount of Government borrowing prior
to 1898. For the Government and non-Government borrowings
after 1898 we have made use of Lehfeldt's average rates of
interest on colonial fixed-income issues, and the estimate of
3 per cent is used for the non-Government borrowings effected
before 1898-99.
IO2 India's Balance of Indebtedness
In striking the balance of India's credits and debits foreign
capital investments in India is the only item for which we
have not made a direct estimate. But an indirect estimate of
the amount of such investments has been reached on the
assumption that all the immediate obligations, credit as well
as debit, balance each other every year, and that any debit
surplus remaining after all the credits have been set off against
all the debits represents the debit obligations whose settlement
was postponed, that is, foreign capital investments in India.
"By this method the estimate of the final balance when pre-
sented will bear an unearned air of exactitude." 1 If on the
other hand direct evidence about the amount of foreign capital
invested in India bears out even approximately the estimate
reached here, it may be regarded as a satisfactory verification
of the calculations made in this chapter, including the estimates
for all the other items'. An attempt at such verification is made
in the next chapter.
As we have calculated the interest charges payable by
India every year, the partial balance of service transactions
presented in Chapter II can now be completed (Table XX).
The Final Balance of India's International Indebtedness is
presented in Table XXI.
1 J. Viner's Canada's Balance of International Indebtedness, Jpoo jj,
p. 102.
India's Balance of Indebtedness
103
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CHAPTER V
CAPITAL INVESTMENTS IN INDIA
A VERIFICATION
BY a roundabout process we have arrived at the probable
amount of capital invested in India during the period 1898-99
to 1913-14. The calculation is based on the assumption that
the immediate debit and credit obligations of a country balance
one another during a year. No abstruse argument is needed to
justify this assumption. When, therefore, all the items except
foreign investments 1 entering into the balance sheet of India
have been evaluated, the excess of debits or credits revealed
must naturally be due to net foreign borrowing or lending. If
we can now secure a direct verification of this indirect estimate
of foreign capital investments in India during the period of
our study, we shall incidentally construct an effective test of
the accuracy or otherwise of the values assigned to the in-
visible items. In the following pages we make such an attempt.
STATISTICS OF INTERNATIONAL INVESTMENTS
During the pre-war period almost all the capital imported
for the development of this country was received from Great
Britain. There is a considerable amount of statistical data
relating to the investment of such capital in India. But while
handling the statistical information one has to be cautious. In
the first place much of the available information is of question-
able accuracy, and that which can be considered as accurate
fails to cover the entire period of our study. Besides, statistics
of foreign investments display certain characteristic features
1 C. K. Hobson defines foreign investments as that part of the
property of a country and its inhabitants which is situated abroad
and from which its owners expect to derive an income. Export of
Capital, p. i.
Capital Investments in India A Verification 105
which make it difficult, if not impossible, to arrive at an
accurate and complete estimate of such investments in India.
For certain classes of investments statistical information cannot
be secured at all.
So far as Great Britain's public investments in India are
concerned, there are some reliable compilations, but they
relate only to a few stray years. There is scattered information
on this point available in the issues of the Economist for the
whole period of our study. However, in using the compilations
made even by reliable and competent authorities and in pre-
paring new ones a certain amount of caution is necessary.
First, the term "public investments" is applied to all the
capital investments made through the issue of securities for
public sale after advertisement in financial journals. These
securities are almost invariably issued through brokers and
agents in the capital market. It is, therefore, essential to know
whether the compilations of sugh issues refer to nominal or
par values or are based on the actual issue prices of the
securities, as the results obtained for common shares will
differ appreciably according to the method used. For fixed-
income securities and common stock, compilations based on
issue price are preferable for our present purpose, which is to
ascertain India's balance of indebtedness during the pre-war
period of the gold-exchange standard. On the other hand, in
the case of bonds and debenture stocks, par values can be
used in preference. For share securities, which do not involve
any contractual obligation about the repayment of the principal
at some definite future date, it is debatable which method of
compilation will yield reliable and satisfactory results. Never-
theless, in order to ascertain the actual flow of capital into
India we have followed Viner, 1 and used issue price for all
classes of securities except the Government and Railway
securities whose nominal value alone is recorded in the
Financial Statistics of the Government, which form an im-
1 J. Viner, op. cit., p. 109.
io6 India's Balance of Indebtedness
portant source of our information. From the issue price we
have also deducted the shares of the vendor and the promoter.
Secondly, when a loan is simultaneously floated in different
countries the total issue may be recorded in the compilations
of all the markets. So also, when a loan is raised in one
country a part of the securities might subsequently travel to
another country through private dealings on the Stock Exchange
and may figure in the estimates of one country as public invest-
ments and of another as private investments. In both these
cases the amount of a country's borrowings is likely to be
greatly exaggerated. However, the magnitude of Indian
indebtedness in particular will not be seriously affected by these
duplications in the statistics of international investments.
First, because we know that almost all of our foreign obliga-
tions are held by Britishers. Our loans in the pre-war period
were opened for subscription only in the London Money
Market. Secondly, the published statistics of foreign invest-
ments in India relate only to public investments, so that even
if a portion of one country's public investments in India re-
appeared as the private investments of another, the fact would
not affect the true estimate of India's foreign borrowings.
Thirdly, a confusion between the amount of loans authorized
and the amount actually issued provides a further source of
error. At times, if an issue is under-subscribed, the unsub-
scribed part is withdrawn and reissued on better terms for
the investor. The double inclusion of the reissued part in
such a case must be avoided. Similarly, care must be taken to
see that conversion loans and new issues made to liquidate
maturing obligations are not included in any compilation of
foreign investments. During the period of our study, however,
not a single conversion loan was floated on behalf of India.
GREAT BRITAIN'S PUBLIC INVESTMENTS IN INDIA
For the Sterling Loans of the Government we have used
the figures compiled by the Department of Statistics in
Capital Investments in India A Verification 107
India. 1 These represent the net amount of capital floated every
year in the London Money Market on Government account.
Besides these loans, which constitute the Public Debt of India,
TABLE XXII
PUBLIC INVESTMENTS
OF BRITISH CAPITAL IN INDIA
EVERY YEAR
DURING
THE PERIOD 1898-99 TO 1913-14
(In lakhs of rupees)
Net Amount of Other Loans
Total Amount
Sterling Loans Publicly
of Loans
Raised by the Raised
Publicly Raised
Year
Government* in London^
in London
1898-99
149 375
524
1899-00
18 405
387
1900-01
1,393 855
2,248
1901-02
131 240
371
1902-03
423 360
783
1903-04
612 315
297
1904-05
- 23 570
547
1905-06
2,035 525
2,560
1906-07
1 60 75
235
1907-08
i,344 300 J
1,644
1908-09
673 i,374
2,047
1909-10
i,37o 1,027
2,397
1910-11
1,184 1,032
2,216
1911-12
73 529
602
1912-13
105 455
560
1913-14
- 317 785
468
* Sterling figures converted at is. 4d. per rupee. Statistics of British
India, vol. iii, Financial Statistics, Nominal Value.
t Figures collected from the volumes of the Economist represent
issue price.
t Taken from the Report of the Controller of Currency, 1913-14,
P- 53-
there are others raised by the big industrial concerns and
commercial enterprises carrying on their business in India.
We have collected information about the capital raised abroad
by such concerns from the issues of the Economist. For the
1 These figures are published in the Statistics of British India, vol. iii,
Financial Statistics.
io8 India's Balance of Indebtedness
year 1907-8 figures of the Economist could not be obtained,
and hence we have used the estimate of the annual flow of
such loans prepared by H. F. Howard. This estimate has
been more fully dealt with elsewhere. While collecting the
data from the volumes of the Economist we have taken account
of the amount of loans actually issued at their issue price and
not of the nominal value of the loans authorized. By adding
up the two sets of figures for Government and private
borrowings thus collected, we have arrived at the net amount
of capital publicly floated in London, every year, on behalf
of India. The results are presented in Table XXII.
We see from the table that the Indian borrowings in London
amounted to Rs. 17,292 lakhs during the period 1898-99 to
1913-14. The years 1900-1, 1905-6, and 1907-8 to 1910-11
were years of particularly heavy borrowings, and except in the
year 1903-4 we had a credit balance of payment on capital
account in all years. We shall now examine how far these
figures are correct in the light of investigations made by some
eminent statisticians to arrive at the magnitude of British
investments in India.
i. EDGAR CRAMMOND'S ESTIMATE 1
In 1907 Edgar Crammond made an estimate of the total
amount of British capital invested in foreign countries and
colonies till the end of 1906. Some years afterwards the esti-
mate was brought up to the end of 1910. In his estimate
Crammond has given the amount of British capital absorbed
by every individual country and colony. Besides the main
purpose of Crammond's investigation being to prove the
prosperity of British investments abroad, he has also given
similar figures for the years 1896 and 1897. From this estimate
we get the total amounts of British capital invested in India
at the end of 1896, 1897, 1906, and 1910.
1 Edgar Crammond, "British Investments Abroad," Quarterly
Review, July 1907 and July 1911.
Capital Investments in India A Verification 109
The sources on which Crammond relies for his information
are: The Official List of the London Stock Exchange, the
Official Lists issued by Provincial Stock Exchanges, and the
Stock Exchange Official Intelligence. 1 For calculating the
amount of British capital invested in India he takes into
consideration the value of Indian securities quoted in the
TABLE XXIII
E. CRAMMOND'S ESTIMATE OF BRITISH CAPITAL INVESTED IN INDIA
AND CEYLON
(In lakhs of rupees)*
Year\ 1896 1897 1906 1910
Government Stock . . . . 15,900 19,140
Railways 14,010 19,440
Corporation Stock, Banking,
Financial, Land, etc. . . 750 1,200
Mines 210 . 345
Miscellaneous . . . . . . 3>9o 6,000
Total 44,ioo 34,7?ot 46,125 64,500
* Original figures are in millions of s. We have converted them
at is. 4d. per rupee.
f Calendar Year.
J The figure appears to be incorrect inasmuch as it suggests that
British capital worth Rs. 9,330 lakhs was withdrawn from India during
the year 1897-98. Never in the history of British capital investments
in India has such a large amount of capital been withdrawn from India
during a single year.
Stock Exchange Official Intelligence, which includes the
securities quoted in the other two lists. This method cannot
be applied to estimate the amount of capital employed by
British companies in carrying on their business in India. The
capital of such concerns is therefore completely excluded by
Crammond from his estimate. The figures of British capital
investments in India and Ceylon according to Crammond
are given in Table XXIII.
1 This valuable document contains particulars of all the companies,
home and foreign, whose securities are dealt in or known on any of
the Stock Exchanges of the United Kingdom.
no India's Balance of Indebtedness
II. SIR GEORGE PAISH'S ESTIMATE OF BRITISH INVESTMENTS
IN INDIA
In the same way as Crammond, Sir George Paish, while cal-
culating the total amount of British capital exported, inci-
dentally gives figures for India's indebtedness to Great Britain
on capital account. He supplies two sets of data. From his
first estimate which was embodied in the papers he read
before the Royal Statistical Society we get the total amount of
capital imported from Great Britain into this country till
the year 1910.* In addition, we also find figures of loans
raised for individual years during the period 1906 to 1910,
but they relate only to loans floated on behalf of the Govern-
ment, the Municipalities, and the Railways. His second com-
pilation, which covers the period 1908 to 1913, is more
comprehensive. 2 It gives the total amount of loans incurred
on behalf of India in Great Britain for every year during the
period.
For the major part of his information he relies on the Reports
of the Inland Revenue Commissioners. These reports contain
particulars of the income derived by British investors from
abroad which is disclosed for the purpose of taxation. The
income so earmarked comprises the following heads :3
Income disclosed by agents for payment of interest on foreign
and colonial Government securities.
Income disclosed by agents for payment of dividends and interest
of foreign and colonial companies and corporations.
Income disclosed by bankers and coupon-dealers in connection
with the realization of foreign and colonial coupons.
Income declared by persons, firms,or public companies as received
1 Sir G. Paish, " Great Britain's Investments in Other Lands,"
Journal of the Royal Statistical Society, September 1909; "Great
Britain's Investments in Individual Colonies and Foreign Countries/
ibid., January 1911.
a The Statist, February 14, 1914.
3 53. Inland Revenue Report, p. 128. Quoted by Crammond,
Quarterly Review, July 1911, p. 44.
Capital Investments in India A Verification in
in respect of investments abroad without taxation at the hands of
agents, bankers, or coupon- dealers.
Profits of those railways abroad which are owned and worked
by British companies with the seat of management in the United
Kingdom.
The commissioners, however, point out that besides the
earnings coming under these earmarked heads there exists a
large amount of income which cannot be assigned to any
particular head in the absence of information which the tax-
payer alone can submit. Such unidentified income they include
under the general category of "business, professions, etc.,
not otherwise detailed." It includes the profits derived from
the following sources: 1
Concerns other than railways situated abroad but having their
seat of direction and management in the United Kingdom, e.g.
mines, gasworks, waterworks, tramways, breweries, tea, coffee, and
rubber plantations, nitrate grounds, pil fields, land and financial
companies, etc.
Concerns jointly worked abroad and in the United Kingdom,
such as electric telegraph cables and shipping.
Foreign and colonial branches of banks, insurance companies,
and mercantile houses in the United Kingdom.
Mortgages of property and other loans and deposits abroad be-
longing to banks, insurance companies, land mortgage and financial
companies, etc., in this country.
Profits of all kinds arising from business done abroad by manu-
facturers, merchants, and commission agents resident in the United
Kingdom.
Sir G. Paish does not take account of the income from the
last four sources but amplifies the information on the first
source of income contained in the commissioners' reports by
examining the reports, balance-sheets, and income statements
of several thousand companies. 3 The profits earned by the
1 C. K. Hobson, The Export of Capital, p. 200.
a " In fact, I have examined the reports of all British companies work-
ing abroad about which official information could be obtained. " Sir
G. Paish, Journal of the Royal Statistical Society, vol. 74, part ii, p. 167.
H2 India's Balance of Indebtedness
latter are added to the amount of income from foreign invest-
ments assessed to income-tax in the reports of the Revenue
Commissioners. The total income is then capitalized on a
yield basis of 5-2 per cent. To arrive at the amount of capital
investments in individual countries and colonies different
rates of capitalization are used. According to this estimate the
total amount of British capital publicly invested in India and
Ceylon at the end of 1910 was as follows:
TABLE XXIV*
BRITISH INVESTMENTS IN INDIA AND CEYLON AT THE END OF igiof
(Rs. 1 00,000) J
Government . . . . . . . . . . . . 26,850
Railways . . . . . . . . . . .... 20,475
Corporation Stocks, Banking, Financial, Land, etc. . . 1,320
Mines . . . . . . . . . . . . . . 525
Miscellaneous 5,610
Total 54,78o
* Compiled from the figures published in the Royal Statistical
Society's Journal, vol. 74, p. 180.
f Nominal value.
J The original figures in s are converted at is. 4d. for a rupee.
Sir George Paish, however, confesses that the figures cal-
culated by him are an under-statement. Mr. Henry Beaumont
emphasized the same point in the course of the discussion
on Sir G. Paish's papers 1 at the Statistical Society. Paish's
compilation of British capital invested in India and Ceylon
for every year during the period 1908 to 1913 is presented
in Table XXV.
The figures in Columns II and III for the years 1908, 1909,
and 1910 do not agree though compiled by the same authority.
1 Journal of the Royal Statistical Society, vol. 72, Discussion,
P- 483.
Capital Investments in India A Verification 113
For this no other reason can be assigned but some omission
in the first set of figures compiled in 1910. The difference
appears to be rather serious for the year 1910. We shall,
however, accept the figures in Column III as more accurate,
being the later.
TABLE XV*
ESTIMATE OF BRITISH CAPITAL INVESTED IN INDIA AND CEYLON
EVERY YEAR DURING THE PERIOD 1908 to 1913 ACCORDING
TO SIR G. PAISH
(In lakhs of rupees)"^
The Amount of British Capital Invested in
Year India and Ceylon^.
I II III
1908 2,020 1,965
1909 2,383 2,295
1910 2,208 2,700
1911 765
1912 555
1913 ' 5?o
* Compiled from the information supplied by the London Statist
dated February 14, 1914, and the Journal of the Royal Statistical
Society, vol. 74.
f The original figures in s converted at is. 4d. per rupee.
J The figures exclude conversion loans and vendors' shares and
represent issue price.
Journal of the Royal Statistical Society > vol. 74, p. 172.
III. THE EXTENT OF BRITISH CAPITAL IN INDIA: 1 H. F. HOWARD
Unlike the last two estimates H. F. Howard's estimate relates
exclusively to India and supplies information both for the total
amount of British investments in India at the end of 1910 and
for individual years during the period 1899 to 1913. However,
Howard does not give any information about the sources of
his data bearing on the probable amount of capital imported
by India. He starts with the Government of India loans, which
1 H. F. Howard, India and the Gold Exchange Standard, p. 92.
H
H4 India's Balance of Indebtedness
cover by far the largest portion of capital imported into the
country and which largely represent productive expenditure
on railways and irrigation works. These loans, which amounted
to Rs. 31,500 lakhs at the end of 1910, he assigns entirely to
British investors. The outstanding railway annuities, which
amounted approximately to Rs. 10,950 lakhs, are also taken
into account. Next to Government of India loans are the loans
floated in the open market in London by local bodies in India.
The total amount of these loans on March 31, 1910, was about
Rs. 3,600 lakhs. 1 Allowing for the fact that a large portion of
these loans is held by the natives of India, the Controller of
Currency estimates Rs. 1,500 lakhs as the share of English
investors. He does not give any reasons for the assignment
of this share only. The stock of public companies is the third
important item. At the end of 1908-9 the paid-up capital of
the companies registered in India was Rs. 6,550 lakhs. Much
of this was invested in mills or presses mainly for pressing
cotton, jute, wool, and silk. 2 Allowing for the share of Indian
investors, which was not small, Howard puts Rs. 3,000 lakhs
as the amount of British capital under this head. Here, again,
the division of shares between Indian and British capital seems
to be wholly arbitrary. In the case of companies with a sterling
capital doing their business more or less exclusively in India,
almost the whole of it is taken to be of British origin. By the
close of the year referred to above the capital of these com-
panies amounted to Rs. 10,350 lakhs and the debentures to
Rs. 6,300 lakhs, making Rs. 16,650 lakhs in all. To these
figures Howard adds Rs. 3,900 lakhs on account of the "English
Banking, Loan, and Insurance Capital employed in India."
This takes into account the class of public companies registered
outside India and doing only a small part of their business in
this country, Bringing together all these items we get the total
1 H. F. Howard, India and the Gold Exchange Standard, p. 93.
a The figures exclude the capital of the Presidency Banks, which
amounted to Rs. 360 lakhs.
Capital Investments in India A Verification 115
amount of British capital invested in India at the end of 1910,
as follows:
In Lakhs of Rs*
Government loans 31,500
Railway annuities 10,950
Loans of local bodies 1,500
Companies registered in India . . . . 3,000
Companies with a sterling capital . . . . 16,650
Banking, Insurance, etc 3,900
Total Rs 67,500
* Sterling figures converted at is. 4d. per rupee and represent
nominal value.
Mr. Howard's estimate of British capital imported into
India every year from 1899-1900 to 1913-14 is based on
more reliable data. He collects the relevant figures under four
heads: net debt incurred at London on behalf of the India
Government, net capital deposited by railway companies with
the Secretary of State, capital borrowed by Port Trusts and
other capital loaned to India. Net capital deposited by railway
companies excludes the capital raised by the Bengal and
North- Western Railway "in which Government have no
direct financial concern." The last heading, "other capital
loaned to India/' requires some explanation. Besides the
Government of India, Railways, and Port Trusts, there were
private firms who raised loans in the London Money Market
by issuing public securities. Every year there was some import
of capital into India on this account and this is put under the
category "other capital, etc." Howard arrives at an approximate
figure of these loans on the basis of information published by
the Indian Commercial Intelligence Department to show the
capital of sterling companies working exclusively in India.
The tables relate to the period 1905-6 to 1909-10. He con-
cludes: "Excluding the railway figures the capital loaned to
British India increased during the period from 26 to over
n6 Indicts Balance of Indebtedness
4.0 millions, of which about 5! millions were invested in
tea, 4 millions in navigation, and 3 millions in jute. This
increase is at the rate of 3 millions a year. 1 He assumes the
figure of the new loans made to India by the London Money
TABLE XXVI*
THE ANNUAL NON-GOVERNMENT EXTERNAL BORROWING BY INDIA
ACCORDING TO H. F. HOWARD, 1899-1900 TO 1913-14
(In lakhs of rupees)^
Other Capital Raised
Port Trust by non-Government
Year% Borrowings Concerns in India
1899-00 300
1900-01 300
1901-02 300
1902-03 300
1903-04 300
1904-05 300
1905-06 300
1906-07 300
1907-08 300
1908-09 300
1909-10 150 28s
1910-11 315 S8s
1911-12 120 i6s
1912-13 i6s
I9I3-H
* Compiled from the figures given in Appendix I, Report of the
Controller of Currency, 1913-14.
f Sterling figures converted at is. 4d. per rupee.
J Indian fiscal year from the ist of April to 3ist of March.
Figures compiled from the issues of the Economist refer to calen-
dar years.
Market to be 2 millions for every year during the period
prior to 1909-10. For the rest of the period he has corrected
this average in the light of the information supplied by the
Economist. As we have already collected from an authoritative
1 Report on the Operations of the Currency Department,
P- 52-
Capital Investments in India A Verification 117
Government publication the information about Government
and Railway loans, Table XXVI represents an estimate of
India's non-Government borrowings according to Howard.
LIMITATIONS OF THE PRECEDING ESTIMATES
The estimates of the total amount of British capital invest-
ments made by Edgar Crammond and Sir George Paish do
not refer to India alone but to India and Ceylon together.
Naturally this exaggerates the amount of British capital
invested in India by the amount of British capital invested in
Ceylon.
As a partial off-set against this over-estimate we may take
into account the fact that Crammond and Paish do not take
into account the capital employed in India by the British
shipping companies, telegraph, insurance, and other com-
panies whose head offices are situated in Great Britain. 1 This
omission is likely to introduce a large margin of error in an
estimate of the total amount of British capital invested in
India, because the Exchange Banks and the Shipping com-
panies engaged in the Coastal trade of India with their head
offices in London are supposed to employ a large amount of
their capital in this country.
In addition to this omission, which is common to both these
estimates, there are some other points which tend to undermine
the accuracy of Paish's estimate in particular. Sir George
Paish has formed his estimate of Government loans by
1 "It is necessary to obtain a comprehensive idea as to the amount
of British capital employed or invested abroad to make a further
addition in respect of the capital engaged by British shipping employed
in the colonial and foreign carrying trades and also of the capital
represented by the telegraph, insurance, and other companies carrying
on business partly in the United Kingdom and partly in the colonies
and foreign countries, which cannot, of course, be geographically
apportioned/' E. Crammond, Quarterly Review, July 1907, p. 253.
Vide Sir G. Paish, Journal of the Royal Statistical Society, vol. 74,
p. 187.
u8 India's Balance of Indebtedness
capitalizing the income received by British holders of Indian
Government securities as reported to the British Income Tax
authorities, and of the loans taken by Indian Corporations
by an examination of individual company reports. But the
income actually received by British investors in a particular
year may not represent all the income to which they may be
entitled. 1 In fact, a portion of that income is never brought to
the Home Country, but is reinvested in India. This portion,
therefore, escapes capitalization in the year the computation
is made. Secondly, there is a small amount of British capital
invested in India which does not bring any income to the
investor.* The method of capitalization adopted by Paish
cannot take any cognizance of this amount also. True, our
balance of payments is not affected by such investments so
far as the payment of interest is concerned, because either
they do not bear any interest or the interest is not transmitted
abroad. But the balance of payments must have been affected
by the import of this capital, in the year in which such imports
took place.
H. F. Howard's estimate, on the other hand, is free from all
the criticism directed against the other two estimates. It
refers to British capital investment in India alone and includes
in its purview even the class of capital which does not yield
any interest. Moreover, Howard also makes some allowance
for the capital of the Exchange Banks, Shipping Companies,
etc., which were registered in London and which carried on a
good deal of business in India. But the greatest defect of his
estimate is that it is largely a guesswork. A large amount of
capital employed in India is assigned to Great Britain without
any statistical evidence. Besides, the estimate is also theoreti-
1 "As a matter of fact a large part of the income earned by .British
capital invested abroad was never brought home but was reinvested
in the country from which it was derived." Journal of the Royal
Statistical Society, vol. 72, p. 482.
a Ibid., vol. 74, p. 192.
Capital Investments in India A Verification 119
cally defective on one point; it includes the share of India's
internal debt held by Europeans in India. As a matter of fact,
the capital invested by Europeans in rupee securities is not
imported from Great Britain and, as such, should be omitted
from an estimate of the total amount of British capital invested
in this country. By the term "British Investments'* we mean
capital flowing to India from Great Britain and not the amount
of capital invested in India by Europeans staying in India.
For the sake of comparison we give below all the three esti-
mates of the total amount of British capital invested in India
at the end of 1910-11 :*
(In lakhs of Rs.)
E. Crammond 64,500 India and Ceylon
Sir G. Paish 54>78o India and Ceylon
H. F. Howard 63,000* India
We think that Crammond's estimate is more correct than
the other two inasmuch as it is based on actual data and
takes account of all the classes of British investments in India
except Banking, Insurance, and Shipping capital. To make
the actual results more comparable, we omit from Howard's
estimate Rs. 3,900 lakhs, the capital of the Exchange Banks
and the Shipping companies which is not included in the other
two estimates. Howard's figure for British investments in
India, then, stands at Rs. 59,100 lakhs. This is certainly higher
than the estimate of Sir George Paish, which is admittedly an
under-estimate. On the other hand, it is lower than Cram-
mond's estimate by Rs. 5,400 lakhs. This difference, however,
may be due to the inclusion of British investments in
Ceylon by Crammond. We may, therefore, say that the
1 Calendar Year.
* After making allowance for the inclusion in his original estimate
of Rs. 4,500 lakhs on account of the internal rupee debt held by
Europeans in India.
I2O India's Balance of Indebtedness
estimates of British investments in India prepared by
Crammond and Howard are approximately correct as far as
they go.
VERIFICATION OF TABLE XXII
At the end of the year 1896 the amount of British invest-
ments in India according to Crammond was Rs. 44,100 lakhs.
It went up to Rs. 64,500 lakhs by the end of the year 1910.
This means that British capital worth about Rs. 20,400 lakhs
was invested in India during the period 1896 to 1910.
According to our estimate, which is presented in Table XXII,
the amount of British capital invested in India during the
period 1898-99 to 1913-14 was Rs. 17,292 lakhs. During the
common period 1898-99 to 1910-11, the total amount of
British capital invested in India, according to Crammond,
was Rs. 18,570 lakhs, while according to our calculation the
figure works out at Rs. 1 5, 662 lakhs. 1 The excess of Rs. 2, 908 lakhs
which is shown by Crammond 's estimate is most probably
due to his inclusion of British capital invested in Ceylon.
Therefore, so far as the total amount of British capital imported
into India during the period of our study is concerned, our
estimate is approximately correct. To ascertain the accuracy
of our figures representing the annual flow of this capital we
bring together the relevant data in Table XXVII.
The figures of loans raised on behalf of the Government,
which are taken from the Financial Statistics of India, itself
a Government publication, need no verification. In the case
of non- Government loans we find that Howard's figures, which
1 To arrive at these figures we have deducted from E. Crammond *s
figure for the total amount of British capital invested in India during
1896-97 to 1910-11 the amount of British capital invested in India
during the years 1896-97 and 1897-98, which comes to about
Rs, 1,830 lakhs, and from our estimate, which covers the period
1898-99 to 1913-14, a similar allowance has been made for the
amount of British capital invested in India during the years 1911-12,
1912-13, and 1913-14, which works out at Rs. 1,630 lakhs.
Capital Investments in India A Verification
121
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122 India's Balance of Indebtedness
are the only figures available for comparison, are throughout
lower than the figures compiled by us except for the years
1901-2 and 1906-7. We, however, know that Howard cal-
culated the average amount of sterling capital raised by non-
Government concerns at Rs. 450 lakhs every year, during
the period 1905-6 to 1909-10 and brought it down to Rs. 300
lakhs so as to make it applicable to the period 1899-1900 to
1913-14 as a whole. He has not assigned any reason whatso-
ever for lowering the average to Rs. 300 lakhs for the earlier
years. Later on he made some corrections in this general
average for the period 1908-9 to 1913-14, but on the whole
his figures appear to be somewhat arbitrary and unreliable.
On the other hand, our figures for the total amount of British
capital imported into India are largely in agreement with the
figures of Sir George Paish which are compiled from the
information provided by the Economist. The close approxi-
mation between these two sets of figures bears out their correct-
ness. Therefore, according to all the available evidence, our
estimate of the amount of British capital publicly invested
both for individual years as well as for the period as a whole
is approximately correct.
BRITISH PRIVATE INVESTMENTS IN INDIA
Besides public investments in India, made through the issue
of securities for public sale, there are other investments on
private account. They take a great number of forms and
receive very little publicity. If such investments are made by
the private sale of securities they may be divided into two
classes: first, sales by issuing Governments or Corporations,
of entire issues or large blocks of new issues at the time
of issue, direct to investment companies or to syndicates of
private investors; and second, the transfer of small lots of
Indian securities from Indian to British ownership in the
ordinary course of stock-exchange transactions. But the private
Capital Investments in India A Verification 123
purchase of Indian securities is only one of the methods by
which private capital is invested in India, and as we have
said before, private investments in India assume many other
forms. These include: the investments of British insurance
companies in India; British purchases of Indian mining,
agricultural, and urban interests; the investments of British
shipping companies in Indian coastwise shipping; direct
investments in Indian industrial plants and mercantile estab-
lishments, and British capital used in financing Indian import
and export trade.
It is impossible, however, to get any information bearing
directly on the volume of such investments in India. Hence
resort must necessarily be taken to indirect methods which
might yield some rough estimate. Edgar Crammond has
estimated the total amount of British investments abroad,
both public and private separately, at the end of the years
1897, 1906, and 1910. The percentages of the total amount of
private investments to the total of public investments at the
end of these years were 27, 20, and 14 respectively. 1 According
to Sir George Paish this percentage relation between the
totals of British public and private investments was reduced
by 1-5 during 1910 to 1913,* and though his absolute figures
are an under-estimate they may be taken as a fairly accurate
index of a trend. So it means that at the end of 1913 the
percentage was 12-5. The decrease of private investments
relatively to public investments is due not only to the increase
1 (In lakhs of rupees)
Total Amount of Total Amount of Percentage
Great Britain's Great Britain's of
Year Public Investments Private Investments II to I
I II
1897 2,82,900 77,ioo 27
1906 3>93,ooo 79,500 20
1910 4,90,800 67,500 14
a The figures of Sir G. Paish show that the percentage relation
between Public and Private Investments was 9 at the end of 1910
and 7*5 at the end of 1913.
124 India's Balance of Indebtedness
of Great Britain's public investments abroad during the
period, but also to the absolute decrease in the total amount
of private investments themselves. "The tendency lately with
regard to enterprises abroad had been to turn them into
companies.'' 1 New investments of private capital directly by
the investor or through mercantile and banking houses were
diminishing year by year, while the old investments were being
gradually transformed into public investments by the con-
version of private securities into public securities and private
enterprises into companies. The net result of this process of
transformation can be discerned in the very slight increase of
Rs. 2,400 lakhs, i.e. 3 per cent in the total amount of British
private investments during the period 1897 to 1906 and in the
decrease of Rs. 12,000 lakhs, i.e. 15 per cent during 1906 to
1910. The figures of Sir G. Paish show that this tendency of
private investments to decrease continued till the end of 1913.
The slight increase in the total amount of British private
investments abroad during 1897 to 1906 may very likely be
due to the impetus they received from the heavy outburst of
public investments since 1904. But the impetus seems to have
lasted only for a short time.
On the supposition that the percentage relation between
the total amount of Great Britain's public and private invest-
ments abroad is true also in the case of India taken separately,
we have calculated the total amount of British private invest-
ments in India at the end of 1897, 1906, 1910, and 1913. For
the remaining years covered by the period of our study our
calculations are based on the assumption of equal annual
distribution of the difference in these percentages. The results
are represented in Table XXVIII.
According to this estimate, during the period 1898-99 to
1913-14, private capital worth Rs. 2,293 lakhs was with-
drawn from India or converted into public securities. The
1 Sir R. B. Martin, "Discussion on Sir G. Paish's paper, Journal
of the Royal Statistical Society, vol. 72, p. 486,
Capital Investments in India A Verification 125
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126 India's Balance of Indebtedness
years 1900-1 and 1905-6 were the only years during which
there was a net excess of new private investments over with-
drawals. As shown before, the total amount of British capital
privately invested abroad showed an increase of Rs. 2,400 lakhs
during the years 1897 to 1906. In the case of India there was a
net reduction of Rs. 698 lakhs in that amount during the same
period. This discrepancy, however, can be explained. The
net increase of British private investments during 1897 to
1906 was due to the boom atmosphere generated by the era
of large public investments which dawned in the year 1904.
The period of heavy investments in India began in the year
1905-6, a year after "the recovery of British foreign invest-
ments." During this year there was a net excess of new private
investments in India, but the excess was not big enough to
counterbalance the total amount of net withdrawals which
were effected during 1897 to 1904-5 due to political disturb-
ances in India. Thus this net increase of British private
investments was not transmitted to India, first because large
public investments of British capital in India began a year
later than they began in other countries, and, secondly, because
the political disturbances in India during 1905-6 deterred the
British investor from incurring fresh risks of private invest-
ments. The political unrest in India was also an important
factor 1 which accentuated the general tendency of private
investments to transform themselves into public investments
or to be withdrawn from the country, especially from the year
1905-6 onwards.
Whether British private investments in India were com-
pletely withdrawn or returned to India as public investments,
we consider the net amount of withdrawals every year as a
debit item in India's International Balance of Accounts. If a
part or the whole of the withdrawn capital was reinvested in
India in public securities, it has already been accounted for
1 C. K. Hobson, The Export of Capital, p. 158; E. Crammond,
"British Investments Abroad," Quarterly Review, July 1907, p. 255.
Capital Investments in India A Verification 127
as a credit item. We are counting it twice, once as a debit and
once as a credit, because we do not know the actual amount of
such capital.
The estimate of the total amount of foreign capital invested
in India from 1898 to 1913 reached in this chapter is given in
TABLE XXIX
DIRECT AND INDIRECT ESTIMATES OF GREAT BRITAIN'S CAPITAL
INVESTMENTS IN INDIA
(In lakhs of rupees)
DIRECT ESTIMATE
Great Britain's
Great Britain's
^
Public
Private
Investments
Investments
Indirect
Year
in India*
in India\
Total
Estimate^.
1898-99
524
124
400
409
1899-00
387
~ H4
243
1,225
1900-01
2,248
" + 308
2,556
1,308
1901-02
371
175
196
i>337
1902-03
783
- 85 '
698
577
1903-04
297
-338
~ 635
179
1904-05
547
151
396
1,190
1905-06
2,560
+ 257
2,817
2,497
1906-07
235
246
ii
1,029
1907-08
1,644
271
1,373
2,668
1908-09
2,047
252
i,795
1,428
1909-10
2,397
259
2,138
2,465
1910-11
2,216
357
1,859
728
1911-12
602
151
451
565
1912-13
560
164
396
535
1913-14
468
180
288
1,831
* Supra,
Table XXII.
t
Supra, Table
XXVIIL
J Supra,
Table XXL
Table XXIX along with the corresponding indirect estimate
reached in Chapter VI.
The indirect estimate of the total amount of foreign capital
imported into India during the period of our study is greater
by Rs. 5,011 lakhs than the corresponding figure disclosed by
direct evidence. If the values of the various invisible items
128 Indicts Balance of Indebtedness
in our international transactions, calculated in the preceding
chapters and the direct estimate of the total amount of foreign
capital investments in India during 1898-1913 reached in
this chapter are both approximately correct, these estimates
should fairly agree with each other. The difference of Rs. 50
crores, which is not small, is therefore an indication of the
fact that either the direct estimate or the data of the indirect
estimate are defective. As the direct estimate of the British
public investments in India is based upon fairly complete
data, the discrepancy between the two estimates must be due
largely to the calculations of the British private investments
in India and the data of the indirect estimate. It is more likely
that it can be located in the latter, which involves a large
number of estimates.
In calculating the amount of interest charges paid by India
we have already stated that the application of Lehfeldt's
average rates of interest yielded by fixed-income colonial
stocks to the Government borrowings after 1898 might
exaggerate the volume of India's debits. This for the reason
that the average rates of interest on fixed-income colonial
stock are higher than the rates of interest at which Indian
Government loans were being floated in London. 1 If the
1 Rate of Interest Lehfeldt's Average Rate
on India of Interest on Colonial
Government Loans* Fixed Income Stock
Year (per cent) (per cent)
1901 3-0 3-40
1902 3-0 3-21
1903 3-0 3-21
1904 3-0 3-78
1905 3-0 3-78
1906 3-0 3-85
190? 3'5 3*99
1908 3-5 4-04
1909 3-5 3-96
1910 3-5 4-19
1912 3'S 4'30
1913 4'0 4-44
* D. L. Dubey, Indian Publk Debt, p. 31.
Capital Investments in India A Verification 129
error that has crept into our calculation of interest payments
by India due to this factor can be approximately determined
and the necessary allowance made in the final balance of
indebtedness, it will lessen the discrepancy between the
direct and the indirect estimate of foreign capital invested in
India. The Financial Statistics of British India give us all the
details about the foreign borrowings of India on Government
account and the interest payments thereon. By subtracting the
figures of foreign borrowings on Government account from
the indirect estimate of foreign capital investments in India
reached in the last chapter, we shall get the annual amount of
India's foreign borrowings on non-Government account. To
the amount of interest charges paid by the Government every
year, published in the Financial Statistics, we shall add the
amount of interest charges payable on non-Government
borrowings. To ascertain these interest charges the rate of
interest charged on the totaU amount of such borrowings
previous to 1898 will be assumed to be 3 per cent as before,
and Lehfeldt's average rates of interest will be applied to the
borrowings after 1898. The difference between the amount
of annual interest payments arrived at by this process and that
calculated in Chapter VI will represent the approximate error
caused by the application of Lehfeldt's average rates of interest
to India's foreign borrowings on Government account. Cal-
culations made on the basis of this reasoning disclose an
excess of about Rs. 300 lakhs in the figure of interest payments
by India.
Then, again, in calculating the values of imports and exports
we have not taken into account the sea-borne trade of non-
British India. In a complete balance sheet of India's inter-
national payment, however, credit and debits arising out of
that trade will have to be taken into account. Generally this
sea-borne trade of non-British India reveals an excess of
exports of about Rs. 130 lakhs every year. 1 This omission in
1 See footnote on next page.
I
130 India's Balance of Indebtedness
the primary data, therefore, explains an excess of Rs. 20 crores
in the indirect estimate of foreign capital invested in India.
As regards the extent of unliquidated liabilities the report of
the Controller of Currency for 1913-14 bears ample evidence.
Debits to the extent of Rs. 800 lakhs on account of heavy
cotton imports at the close of that year remained to be un-
liquidated. The still unexplained difference of Rs. 19 crores
between the two estimates may be due to the omission of trans-
frontier trade and to errors arising out of the calculation of
other invisible items. On the whole, considering the incomplete
character of the data available for a direct estimate of the
amount of foreign investments in India, the complicated
character of the indirect estimate made in the preceding
chapter and the necessary resort in both the cases to a large
amount of guesswork, the agreement between the two esti-
mates after these necessary corrections appears to be fairly
close.
For individual years the two sets of estimates disclose much
less agreement. The differences are especially great for the years
1899,1900, 1901, 1906, 1907, 1910, and 1913. Theexcess of thein-
direct estimate of foreign capital imported into India in 1913-14
over the direct estimate may be due to the following causes.
First, a large amount of credits due to India on account of the
export of opium to China in previous years was probably
received in 1913-14. Secondly, much larger sums than usual
were due by India at the close of this year on account of the
heavy imports of cotton goods the settlement of which was
NOTE TO PAGE 129. In the year 1909-10 the figures were as
follows :
Imports
Rs. 1,000
French Settlements . . . . .. 2,055
Portuguese Settlements . . . . 390
Travancore . . . . . . . . 1,140
Kathiawar .. .. .. .. 1,740
5,335 18,420
Capital Investments in India A Verification 131
postponed to the next year. There are also grounds for be-
lieving that the bank crisis which occurred during the year
led to the Exchange banks strengthening their balances in
India. 1 The rest of the discrepancies, as explained by J. Viner*
in the case of Canada, may largely be due to the fact that the
data used for both the estimates were much more compre-
hensive for the whole period of our study than for individual
years, and the apportionment of the values of different items
to individual years was based on conjectural hypotheses. But
,even if the data used were complete and accurate some dis-
crepancy between the two sets of estimates for individual
years might still be expected. A loan recorded in this chapter
as made in a particular year may not have influenced the data
used for the interest estimate in the same year. A .public
issue made in one year may represent the funding of an India
Bill issue or a bank loan made some time previously, or the
transformation of a private investment already made into a
public investment. Imports may be financed by foreign
borrowings either after or before the importation actually
takes place. Other factors similar in character may cause large
discrepancies between the direct and indirect estimates of
foreign capital invested in India. However, the discrepancies
between the two estimates for individual years due to such
causes should offset each other in a series of years. The close-
ness of the two estimates for the whole period of our study
corroborates the hypothesis that the margins between the
estimates for individual years are largely the result of the
difference in time between the flotation of a loan and its
effect on the commodity balance of trade of the borrowing
country.
1 Report of the Controller of Currency, 1913-14, p. 53.
a J. Viner, Canada's Balance of Indebtedness, 1900-13, p. 140.
PART II
MECHANISM OF ADJUSTMENT
INTRODUCTORY
IN the preceding part of this study we have ascertained the
extent of India's deferred payments, i.e. her balance of inter-
national indebtedness during the period 1898 to 1913. These
deferred payments are equivalent to her foreign borrowings.
The pages that follow deal with the process by which India's
balance of indebtedness adjusted itself to her foreign borrow-
ings and brought about an equilibrium in the balance of
immediate payments. As the foreign borrowings of the
Government are spent almost entirely on the purchase of
capital goods in England this problem of adjustment reduces
itself practically to the adjustment of the private balance of
indebtedness to India's non- Government borrowings. 1 Here,
however, it is necessary to point out that the inflow of foreign
capital was not the only factor not even the main disturbing
the even balance between Indian credits and debits which
existed in the years immediately preceding our period. The
increasing volume and value of our commodity exports was
another factor, more important than foreign borrowings,
as we shall see later on, which upset that even balance.
Hence, in trying to establish a causal relation between
India's foreign borrowings and the substantive course of
her foreign trade we should, where possible, make due
allowance for other influences, including the unusually
large demand for our export commodities, in the first
decade and a half of the twentieth century. These other
influences at times over-shadowed the effect of foreign
borrowings.
If one and the same metal gold or silver is the circulating
medium of the trading countries and moves freely between
them, the mechanism of adjustment of the balance of inter-
1 Report on the Operations of the Currency Department, 1913-14,
p. 49.
136 India's Balance of Indebtedness
national indebtedness of a country to its foreign borrowings
will be, according to Mill, as follows:
Commerce being supposed to be in a state of equilibrium when
the obligatory remittances begin, the first remittance is necessarily
made in money. This lowers prices in the remitting country, and
raises them in the receiving. The natural effect is that more com-
modities are exported than before, and fewer imported, and that,
on the score of commerce alone, a balance of money will be con-
stantly due from the receiving to the paying country. When the
debt thus annually due to the tributary country becomes equal to
the annual tribute or other regular payment due from it, no further
transmission of money takes place ; the equilibrium of exports and
imports will no longer exist but that of payments will ; the exchange
will be at par, the two debts will be set off against one another,
and the tribute or remittance will be virtually paid in goods.
This explanation assumes, first, that the period of borrowings
is immediately preceded by a period of even balance between
the credits and debits of the borrowing country and, secondly,
that the borrowings continue at an even and steady rate for a
fairly long period.
Mill also states that the flow of the circulating medium,
gold, from the lending country to the borrowing is preceded
by the price of bills on the borrowing country, reaching the
gold-export point in the lending country and remaining at it
so long as the flow continues. Thus, when the circulating
medium is the same in two or more trading countries and
moves freely between them the mechanism of adjustment,
according to Mill, consists of five successive stages in the
following order: 2
(i) A rise in the price of bills on the borrowing country to the
gold-export point.
(ii) A flow of gold from the lending country to the borrowing
1 J. S. Mill, Principles of Political Economy, Book iii, p. 627.
* J. Viner, Canada's Balance of International Indebtedness, igoo-l J,
p. 146.
Introductory 137
country accompanied by foreign exchange at the gold-export and
import points in the respective countries.
(iii) Adjustment of the price-levels between the two countries
to the changes in the stock of monetary gold. Prices rising in the
borrowing country and falling in the lending country.
(iv) Changes in imports and exports, the borrowing country
acquiring an unfavourable balance of trade and the lending country
acquiring a favourable balance of trade.
(v) After the unfavourable balance of trade of the borrowing
country has become exactly equal to the rate of her foreign bor-
rowings, the return of foreign exchange to parity, the cessation of
specie flows and the stabilization of relative prices in the two
countries at their new levels.
It is obvious, however, that the mechanism of the flow of
specie, of prices, and wages rising or falling because of gold
movement, of readjustment through a new level of prices and
money incomes in each of the countries do not operate in the
same way where the monetary systems rest on a different basis.
If there is gold standard in one country and inconvertible
paper in the other or gold in one and silver in the other, the
mechanism of adjustment is somewhat different. However, it
is a generally accepted theory that the ultimate phenomena of
trade between two countries cannot be fundamentally different
because of differences in their monetary systems. 1 Just as trade
between individuals will be carried on in much the same fashion
under barter as under money regime and on the same terms
under one monetary system or another, so will be the trade
between nations. But in precisely what manner are these
results, ultimately similar as we expect them to be, brought
about when the monetary systems are dissimilar ? India during
1898 to 1913, the period of our study, had a gold-exchange
standard. The even balance between her credits and debits
was disturbed during this period, partly by her heavy borrow-
ings in Great Britain, a country on the gold standard. The
particular problem for us to investigate is the process by
1 F. W. Taussig, International Trade, p. 337.
138 India's Balance of Indebtedness
which the effects of this disturbing factor were absorbed by
our balance of trade, and to what extent this process resembles
the mechanism operating between two countries both on the
gold standard. To this end we shall first consider in brief the
essentials of the gold-exchange standard.
THE GOLD-EXCHANGE STANDARD
11 Gold-exchange standard may be said to exist when gold
does not circulate in a country to an appreciable extent, when
the local currency is not necessarily redeemable in gold, but
when the Government or Central Bank makes arrangements
for the provision of foreign remittances in gold at a fixed
maximum rate in terms of the local currency, the reserve
necessary to provide these remittances being kept to a con-
siderable extent abroad." 1 It seeks to maintain a fixed rate of
exchange and to conduct international trade without the actual
use of gold as currency, and with as little flow of gold from
country to country as possible to settle their international
balances of payment. (Though the local currency of a country
adopting the gold-exchange standard is not necessarily con-
vertible into gold, international trade is carried on as if it
were so.)
The establishment of the gold-exchange standard in India
was an accident. 2 The Fowler Committee, which reported in
1898, recommended a gold standard and a gold currency
as the ideal to be realized by the Indian currency system in
course of time. But by a turn of circumstances this ideal fell
into the background, and the various changes that were intro-
1 J. M. Keynes, Indian Currency and Finance, p. 30.
a Report of the Royal Commission on Indian Finance and Currency,
I 9 I 4> paragraph 45 : "The system actually in operation has accord-
ingly never been deliberately adopted as a consistent whole, nor do
the authorities themselves appear always to have had a clear idea of
the final object to be attained. To a great extent this system is the
result of a series of experiments."
Introductory 139
duced into the Indian monetary system from time to time as
measures to solve individual practical difficulties gave it the
substance as well as the form of the gold-exchange standard
system. The inauguration of the system as well as the forma-
tion of its "central mechanism/* the Gold Standard Reserve,
dates from Sir Edward Law's minute of June 28, 1900. However,
for all practical purposes, and for the sake of this study, the
system can be said to have existed in India from 1898, the
year in which the Fowler Committee reported. The main
features of the gold-exchange standard system as it existed in
India during the pre-war period may now be summarized as
follows:
(i) The rupee, a silver token coin, was unlimited legal tender
and was not convertible by law.
(ii) The British sovereign was unlimited legal tender at i to
Rs. 15 and was convertible at that rate, i.e. the Government was
bound to give Rs. 15 in exchange for 1.
(iii) The Government, as a matter of administrative practice, were
willing to give sovereigns for rupees, but that entirely depended
on their discretion, and large quantities of gold could not be
obtained by tendering rupees.
(iv) Similarly, as a matter of administrative practice the Govern-
ment were willing to sell sterling bills on London in return for
rupees at a rate not more unfavourable than is. 3!^. per
rupee. For this a gold reserve was formed and kept in London.
(v) To prevent the flow of gold to India the Secretary of State
for India had put a standing notification that he would sell Council
Bills on India at is. 4^d. the gold -import point of India.
To explain the mechanism of adjustment of India's balance
of indebtedness to her foreign borrowings under the gold-
exchange standard we now take up for examination the opera-
tion of exchange variations, gold movements, changes in
relative price-levels, and changes in the commodity balance of
trade in the order given. The influences of these factors will
be considered mainly from the Indian point of view.
CHAPTER VI
FOREIGN EXCHANGE AND GOLD MOVEMENTS
(l) FOREIGN EXCHANGE
VARIATIONS in the rate of foreign exchange through their
influence on the profitability or otherwise of commodity
imports and exports and on the transfer of securities and bank
deposits from country to country bring about an adjustment
of international balances. If the supply of bills on foreign
countries is larger than the demand for them, they fall in price
and the currencies of the foreign countries depreciate in
terms of the currency of the country in question. Consequently,
foreign goods become cheaper by the amount of depreciation
of their currency units. Imports of foreign goods increase. On
the other hand, if the supply of bills is less than the demand
for them, they rise in price and the currencies of the foreign
countries go to a premium. This makes foreign goods dearer
by the amounts of the premia and their exports are checked.
When India begins to borrow in London, the supply of bills
on London outstrips the demand, and the sterling exchange
becomes favourable to her. The favourable exchange gives a
bounty to importers and imports are stimulated, while the
same favourable exchange becomes a tax on exporters and
exports from India are checked. In this fashion at least a
small portion of the borrowed funds comes to be transferred
to India in the form of commodities. However, to understand
the exact significance of the part played by the variations in
the exchange rate in the mechanism of adjustment we must
distinguish between casual and permanent disturbances to the
even balance of credits and debits.
In the absence of speculative purchases and sales of foreign
exchange, the exchange rate would always stand at one of three
Foreign Exchange and Gold Movements 141
positions. If there is an even balance between the immediate
receipts and payments of a country, the exchange will be at
par; if the balance is against the country the exchange will be
at the gold-export point, and if the balance is favourable, the
exchange will be at the gold-import point. But, in fact, the
exchange is always fluctuating between the gold-points and is
rarely at par. The variations between the gold-points are due
to the calculations and trading of the bankers and brokers who
deal in foreign exchange. They sell forward at less than the
gold-export point when the balance of payments is turning
against the country and when they believe that the current of
payments will turn round in due time. They buy exchange in
advance at more than the gold-import point if they believe it
can be done with profit in anticipation of a subsequent move-
ment in the opposite direction. The general effect of these
operations is that they prevent the exchange rate from reaching
the gold- points and thereby prevent gold movements between
the trading countries. However, the exchange rate can be
prevented from reaching the gold-points only when the
fluctuations in the international balance of indebtedness about
the even balance of credits and debits are temporary. So long
as the basic conditions tend to bring about an even balance of
payments, casual disturbances in one direction are likely to
be offset after a time by disturbances in the reverse direction.
In fact, the operations of Exchange dealers and speculators are
based on this assumption. It can, therefore, be conceded that
so long as the disturbances to the even balance of credits and
debits of a country are casual and tend to be offset by dis-
turbances in the opposite direction within a short time, varia-
tions in exchange rate between gold-points are an important
factor in the adjustment of the balance of indebtedness.
Even then they bring about the adjustment not so much
by their effect on the imports and exports of commodities
as through their influence on the transfer of securities
and bank balances, on the settlement or postponement
142 India's Balance of Indebtedness
of maturing obligations, and on international short-term
loans.
Apart from casual disturbances, the even balance between
the credits and debits of a country is likely to be upset by
other factors, more or less permanent. A growing demand for
a country's exportable commodities or continued foreign
borrowings are instances of such factors. The adjustment of
the balance of international indebtedness to foreign borrowings
consists not in the re-establishment of the equilibrium between
all credits and all debits immediate as well as deferred, but in
the establishment of an even balance between immediate
payments through the creation of an excess of trade debits
over trade credits equal to the amount of current foreign
borrowings so that the borrowed capital enters the country in
the form of commodities and not of gold. If foreign capital
continues to be imported for a fairly long period at a steady
rate, the change in the exchange rate alone will not be able
to bring about these adjustments without being indefinitely
favourable to the borrowing country. But the exchange rates
cannot continue to be favourable to any country having a
gold standard, or even for the matter of that a gold-exchange
standard, without reaching the gold-import point and giving
rise to an inflow of gold or its equivalents.
The exchange rates show an aversion to reaching the gold-
points only when the disturbances to the even balance of pay-
ments are temporary and when there is the probability that
the turn of the exchanges in one direction will soon be followed
by a turn in the other direction. They are prevented from
reaching the gold-points in consequence of minor disturbances
to the balance of payments by means of financial operations
such as postponement or settlement of maturing obligations,
transfer of securities and bank deposits, investments in short-
term loans which either create payments in one direction or
diminish the volume of payments in the other direction. Such
operations are, however, necessarily limited in their volume
Foreign Exchange and Gold Movements 143
and are undertaken as temporary measures to be reversed in
their direction, when the balance of payments moves to the
other side of the equilibrium. If the balance of immediate
payments, even for a short time, is such that the supply of
or demand for foreign bills is greatly in excess of the demand
or supply, the additional demand or supply created by the
financial operations in the speculative market will not be
sufficient to keep the exchange within gold-points. Much
more so if the supply of foreign bills continues to be greatly
in excess of the demand for a pretty long period, as generally
happens in the case of continued foreign borrowings. Financial
operations which are attractive to the speculators so long as
disturbances are temporary cease to be so when the disturbing
factor is more or less permanent.
Gold movements play their part in the mechanism of adjust-
ment through their effect on the prices of commodities enter-
ing into international trade. Therefore, though a favourable
exchange rate may be expected to co-operate with the effect
of gold movements on prices at the beginning of foreign
borrowings to stimulate commodity imports and check exports,
variations in the exchanges exhaust their direct influence,
when a fall in the foreign exchange is first a preliminary to
the import of gold and then accompanies the import of gold. 1
When prices in the lending and the borrowing country
f Professor J. H. Hollander contends that the adjustment of the
balance of indebtedness to foreign borrowings is effected without
gold movements, through the influence of exchange variations within
the gold-points on the commodity balance of trade. "International
Trade Under Depreciated Paper : A Criticism." 32. Quarterly Journal
of Economics, p. 678.
Professor Taussig in a rejoinder to Hollander shows that he is
over-estimating the influence of the variations in the exchange rate
in affecting the substantive course of trade. Ibid., p. 692.
J. Viner goes further and gives a satisfactory demonstration by
his study of Canadian conditions during 1900 to 1913 that "exchange
rates cannot operate at all, except at the beginning of the period of
borrowings." Canada's Balance of International Indebtedness,
P- 151-
144 India's Balance of Indebtedness
stabilize at the new levels, the balance of immediate payments
becomes even, gold imports cease, and exchange returns to
parity.
RUPEE-STERLING EXCHANGE AND THE GOLD-POINTS
India's foreign trade is financed by Exchange Banks which
have their head offices in London. The Indian branches of
these banks discount the bills drawn by the Indian exporters
and send them for collection to their head offices in London.
The Indian exporters receive their payments in rupees while
the Exchange Banks in London collect the bills in sterling.
To reimburse themselves with rupee funds in India again to
finance the export trade the Exchange Banks purchase as
many private bills on India as can be obtained. But generally
the supply of bills on India, thanks to her favourable com-
modity balance of trade, is less than the demand for them.
Under the circumstances the rupee sterling exchange should
rise to the gold-import point and the favourable balance of
trade be settled by gold imports. But this process could not
operate during the period of our study because of the inter-
vention of an extraneous influence. The Secretary of State for
India who had annually to make payments in sterling for
"Home Charges," etc., taking advantage of the normal favour-
able balance of trade, offered to sell bills on India. The
"Council Bills/' as these bills were called, found ready pur-
chasers in the Exchange Banks and were cashed at Bombay,
Calcutta, or Madras from the Government Treasuries, where
the Home Charges which were chargeable to the Indian
revenue were collected in rupees. Since 1904 the Secretary
of State had been selling the Council Bills, not only to defray
the Home Charges, but also to meet the demands of the
Exchange Banks for remittances to India on trade account.
By the sale of Council Bills the Government of India saved
the expenses of remitting rupees to London to purchase gold
for the liquidation of her sterling obligations, while the
foreign Exchange and Gold Movements 145
Secretary of State gained an extra commission for dealing in
rupee exchange. Thus, as the Secretary of State for India was
one of the largest dealers in rupee exchange, the price at which
Council Bills were bought and sold can well be considered an
index of the rupee-sterling exchange.
The Fowler Committee fixed the value of the rupee at is. 4d.
by making the sovereign a legal tender coin exchangeable for
15 rupees. The maintenance of this ratio was the main object
of the Government's currency policy during the pre-war
period of the gold-exchange standard. The range of variations
in the rupee-sterling exchange or the gold-points were there-
fore determined by the cost of remitting sovereigns from
London to Calcutta or from Calcutta to London. This cost of
remitting gold from London to India generally did not exceed
|d. per rupee. The upper limit to which the rupee-sterling
exchange could fluctuate was therefore is. 4jd., while the
lower limit was is. 3fd. Theses, however, are the extreme
limits between which the rupee-sterling exchange could
fluctuate. Actually the cost of importing gold into India
depended on complex causes varying considerably from time
to time and might have been less than d. per rupee with
consequent reduction in the gold-import point. 1
The cost of remitting gold from London to Calcutta consists
of freight, insurance charges, and loss of interest during
transit. Variations in freight and insurance charges are com-
paratively unimportant. "The main part of variation in the
gold- point arises either out of the possibility of getting sovereigns
from other sources than England or from variations in the
rate of interest. " 2 These other sources during 1898-99 to
1913-14 were the sovereigns in transit from Australia or the
1 The Government had practically pledged their word to do all
in their power to prevent the depreciation of the gold value of the
rupee below is. sff d. Vide H. Stanley Jevons, Money, Banking and
Exchange in India, 1922.
> J. M. Keynes, Indian Currency and Finance, p. 115.
K
146 Indicts Balance of Indebtedness
sovereigns ready to be exported from Egypt. Whenever the
Australian exchange was such that it paid to export sovereigns
from Australia to London, it was always profitable for the
banks which exported them to get cash in London for their
delivery in India. For while the freight and insurance charges
on the shipment of sovereigns to London and to India, which
lies on the shipping route between Australia and London,
were the same, the bank could get its money a fortnight earlier
by delivering the sovereigns in India rather than carrying
them straight to London. This meant a gain of a fortnight's
interest on the money. It was, therefore, willing to accept
about is. 3 |d. in London for is. 4d. delivered in India
^2 being the interest on is. 4d. for a fortnight at 5 per cent
per annum. The gold purchased in this fashion became
equivalent to a telegraphic transfer on India, i.e. it was worth
^d. more than the Councils. Hence, whenever the price of
Council Bills was more than is. 3y|d. per rupee, sovereigns
in transit from Australia were preferred as a means of remit-
tance to India.
The gold exports from Egypt were not so serious a com-
petitor to Council Bills as the Australian sovereigns. As the
cost of sending gold to India from Egypt, which lies between
India and London, is the same as the cost of sending gold to
London, an Egyptian bank remitting gold could accept any-
thing more than is. 4d. in London for the delivery in India
of a rupee worth of gold. Hence, whenever the Alexandrian
exchange on London was below par and the Council Bills
were at about is. 4-^d. per rupee, Egyptian gold could under-
cut the Councils as a means of remittance to India. However,
the amount of remittances available from this source was very
limited because the weak Alexandrian exchange which stimu-
lated the flow of gold out of Egypt gathered strength when
some gold was exported and thus modified the conditions
governing the gold flow. Nevertheless, when at the end of the
season the Egyptian banks found themselves in possession of
Foreign Exchange and Gold Movements 147
more gold than they needed, the Councils had to be sold at a
relatively low price to prevent the flow of that gold to India.
Besides the availability of gold from Australia and Egypt
for exportation to India the variations in the Indian bank-
rate also led to variations in the gold-import point. As said
before, the loss caused to the exporters of gold from London is
^ 2 d. per rupee when the Indian bank-rate is at 5 per cent.
If this bank-rate rises the loss will be more ; if it falls the loss
will be less with consequent changes in the gold-import point.
These considerations lead us to the conclusion that the gold-
import point of India during the pre-war period of the gold-
exchange standard was subject to variations from extraneous
causes like a fall in the Australian or Alexandrian exchange.
To the extent the variations in the rupee-sterling exchange
about par were due to these causes, they were not deter-
mined by India's balance of immediate payments. To carry
out his policy, which was to prevent export of more gold to
India than was actually required for absorption by the public, 1
the Secretary of State had to offer Council Bills at a price at
which the Australian or the Egyptian gold might have been
delivered in India. But it is not always easy to know at exactly
what price Australian or Egyptian gold will undercut Council
Bills as a means of remittance, and hence "not infrequently" they
were " unintentionally sold at a price which made it cheaper
to send gold." If we leave out of consideration these extraneous
factors which were never very serious, the gold-import point
of India during the pre-war period of the gold-exchange
standard could be regarded as being is. 4^d. (is. 4'i25d.)
and the gold-export point at is. 3fd. (is. 39o6d.), below
which the Secretary of State did not offer any bills.
To understand the part played by variations in the exchange
rate in bringing about an adjustment between India's balance
of indebtedness and her foreign borrowings we give in
Table XXX the average rate of exchange, the commodity
1 G. F. Shirras, Indian Finance and Banking, p. 304.
148 India's Balance of Indebtedness
balance of trade, and the foreign borrowings for every year
during 1898 to 1913.
Throughout the greater part of the period of our study
TABLE XXX
THE AVERAGE RATE OF EXCHANGE, THE COMMODITY BALANCE OF
TRADE, AND FOREIGN BORROWINGS
Year
1898-99
1899-00
1900-01
1901-02
1902-03
1903-04
1904-05
1905-06
1906-07
1907-08
1908-09
1909-10
1910-11
1911-12
1912-13
Average
Rate of
Exchange
s. d.
3-972
4*069
3'973
3-988
4*002
4-047
4-045
4-042
4-087
4-031
3-93I
4-037
4-060
4-083
4-059
4-069
Balance
of Trade
Rs. 1,00,000
3,556
2,700
2,291
3,486
3,575
4,534
3,854
3,283
2,762
1,176
1,732
4,220
5,141
5,067
4,144
3,596
Foreign
Borrowings.
Indirect
Estimate*
Rs. 1,00,000
409
1,225
1,308
1,337
577
179
1,190
2,497
1,029
2,668
1,428
2,465
728
565
535
1,831
* The indirect estimate has been preferred to the direct estimate
because it gives the figures of capital actually imported in India every
year during the period. The direct estimate is based on the years
of flotation. But the capital floated in a particular year is not neces-
sarily imported in the same year. To trace the relation between
foreign exchange and foreign borrowings we want the estimate based
on the years of importation.
sterling funds were at a discount in India, this being due to
the increasing demand for India's exports and her foreign
borrowings, the two factors which disturbed the even balance
between India's credits and debits. It is not, however, possible
to trace the variations in the exchange due to either of the
factors severally.
Foreign Exchange and Gold Movements 149
As seen in the table the average rate of exchange was below
par only during four years: 1898-99, 1900-1, 1901-2, and
1908-9. The unfavourable average rate of exchange in the
year 1898-99 was due to the fact that the sterling value of the
rupee, which had been rising since 189535 a result of the closure
of mints to the free coinage of silver, had not yet reached
is. 4d. till the middle of that year. It can even be said that
this improvement in the sterling value of the rupee was brought
about by the favourable balance of trade of the year. In 1900-1
it was the decrease in the favourable balance of trade which
brought about a fall in the exchange rate. The slight improve-
ment in the exchange rate, still below par, during the next
year, in spite of heavy foreign borrowings and a large favourable
balance of trade is apparently anomalous. However, it ceases
to be so when we know that the marked revival in the favourable
balance of trade came late in the year, 1 and thus had no pro-
portionate effect on the average* of the rates of exchange pre-
vailing during the whole year. It can, therefore, be legitimately
inferred that simultaneously with the increase in the favourable
balance of trade and foreign borrowings there was an improve-
ment in the exchange rate. The circumstances of the year
1908-9 were exceptional. The American crisis of 1907 over-
took India in the fiscal year 1908-9 in the form of an un-
favourable balance of payments and an unfavourable exchange
caused by a fall in the volume of Indian exports and her
foreign borrowings. The decrease in the volume of foreign
borrowings as compared with the preceding year was as im-
portant a factor in turning the exchange rate as the smaller
volume of exports. 2
Excluding these four years the rate of exchange was
favourable to India throughout the period 1898 to 1913. It
was the result both of an increasingly favourable balance of
1 W. L. Thorp, Business Annals, p. 335.
J. M. Keynes, "Recent Economic Events in India/ 1 19. Economic
Journal, p. 61.
150 India's Balance of Indebtedness
trade caused by the growing volume of exports every year and
the foreign borrowings which, however, were fluctuating in
their volume. It is not possible to ascertain the effect of these
factors separately.
The range of variations between the fortnightly averages 1
of the rates of exchange as well as the annual averages was
very narrow. Even the maximum range to which the exchange
rate could have fluctuated, i.e. the difference between the
gold-points, was about 2 per cent. Evidently the fluctuations in
the exchange rate cannot be supposed to have exerted any
appreciable influence on the relative volume of Indian imports
and exports in bringing about the adjustment of her balance
of indebtedness to her foreign borrowings.
(2) GOLD MOVEMENTS
As we have said before, variations in the exchange rate play
an important part in bringing about the adjustment of the
even balance of international credits and debits to casual
disturbances. But in adjusting them to major and continuous
disturbances, caused, for example, by an increasing demand
for the export commodities of a country or by an influx of
foreign capital, their influence is very small. The adjustment is
necessarily effected in the case of countries on the gold
standard by gold movements operating directly on the balance
of payments and, more important, indirectly through their
effect on the prices of international commodities 2 and, conse-
quently, on the commodity balance of trade.
The even balance between India's international credits
and debits was disturbed in the beginning of the pre-war
period of the gold-exchange standard by two factors of great
importance. One was the increasing demand for her exports,
1 "Statistics of British India," vol. iii, Financial Statistics, pp. 92-95.
a "International commodities" are the commodities which enter
into international trade as opposed to the "domestic commodities,"
which do not move between one country and another.
Foreign Exchange and Gold Movements 151
and the other the import of British capital. Both these factors
were operating during the major part of the period of our
study. The variations in the rupee-sterling exchange between
is. 4^d. the gold-import point and is. 3f-fd. the gold-export
point, even if they had been of the maximum extent, could
not have been a sufficiently powerful factor to adjust India's
balance of payments to the influence of either of these two
factors. In fact, the variations in the annual and fortnightly
averages of the rates of exchange were, as stated before, very
small. Therefore the adjustment of the balance of payments
could have been brought about in the main almost wholly
by means of gold imports through their effects direct and
indirect on the Indian price-level. But generally the gold
which India imports in settlement of her favourable balance
of payments is not used on an extensive scale for internal
circulation, nor is it kept in bank reserves and mobilized for
credit and exchange purposes. "It is used for conversion into
ornaments and for similar purposes; it is also hoarded/' 1
Even sovereigns and half-sovereigns which were declared legal
tender in India in 1898 did not form an appreciable portion
of the currency circulation in India during the pre-war period
of the gold-exchange standard. 2 All the imports of gold during
the period of our study cannot, therefore, be supposed to have
affected the Indian price-level. Only that portion of the
gold-imports which either went directly into circulation in
the form of sovereigns or indirectly through Government
Treasuries and the paper currency reserves in the form of
silver rupees and notes the chief circulating media of exchange
in India could have affected prices.
1 G. Findlay Shirras, Indian Finance and Banking, p. 280.
* The attempt to introduce sovereigns in circulation made in
1900-1 failed. But it is reported that sovereigns were being used as
currency in some of the provinces of India in the closing years of
our period. Nevertheless their proportion to the total currency
circulation in India was insignificant. See H. F. Howard, India and
the Gold Standard ', pp. 28 and 47.
152 India's Balance of Indebtedness
Since the closure of mints to the free coinage of silver in
India the only way of making additions to the currency cir-
culation was to tender gold to the Government in exchange
for rupees or notes. The volume of paper currency issued on
the backing of Government securities was an insignificant
percentage of the total currency circulation. In 1892 the value
of the currency notes backed by Government securities was
Rs. 8,00 lakhs. It increased to Rs. 1,000 lakhs in 1897 to
Rs. 1,200 in 1905, and to Rs. 1,400 lakhs in 1911. * To get
rupees in India it was left to the option of those possessing
gold and requiring rupees in exchange to tender it either to
the Government in India or to the Secretary of State for India
in London. The Council Bills in effect were in the nature of
certificates, stating that the holder of such bills had deposited
a certain amount of gold with the Secretary of State. The
Government of India were bound to cash these certificates
on their presentation to the Treasury. Since the introduction
of the gold-exchange standard in India the Council Bills had
been used by the Secretary of State to prevent the flow to
India of that portion of our gold imports which represented
a demand for additional currency. This he effected by offering
Council Bills at rates below the gold-import point. Thus the
gold which was imported into India, in spite of the Secretary
of State's offer of Council Bills, must have been mostly for
industrial uses or for the purposes of hoarding. It had, there-
fore, no more effect on the price-level in the country than the
import of any other commodity.
As the prevention of monetary gold* flowing to India was
1 Though the securities backing the paper currency in India were
chiefly to be the Government of India rupee securities, it was decided
in 1905 that Rs. 200 lakhs and in 1911 Rs. 400 lakhs may be in the
form of English securities.
* By the term "monetary gold" we mean the gold which influenced
the Indian price-level as distinct from the non-monetary gold which
had no more effect on the Indian price-level than the importation
of any other commodity.
Foreign Exchange and Gold Movements 153
the declared policy of the Secretary of State, and since it was
carried out by offering Council Bills at rates lower than the
gold-import point, the amount of Council Bills sold every
year can be considered to represent approximately the amount
of monetary gold which could have been imported in India
in the absence of the mechanism of Council Bills. 1 In fact, even
though this gold was prevented from flowing to India, the
price-level in the country was affected in the same way as if
it actually flowed. That is to say, the gold which was inter-
cepted by the Secretary of State in London had its full effect
on the currency circulation in India through the encashment
of Council Bills in India. To trace how far India's heavy
surplus of commodity exports and her foreign borrowings
entered the country in the form of monetary gold, i.e. in the
form of Council Bills, we give in Table XXXI the relevant
figures.
The sale of Council Bills as explained above is the equivalent
of the flow of monetary gold to India that would have other-
1 All the Council Bills cashed in India do not represent a net
addition to the currency circulation. As explained in Chapter V the
main function of the mechanism of Council Bills is to enable the
Secretary of State to meet the sterling liabilities of the Government
of India on account of the Home Charges. In order to meet these
liabilities the Government of India collect rupees by means of
taxation. When people pay the taxes for remission to a foreign
country the currency circulation in the remitting country is reduced
to that extent. But in India the rupees collected for remission to
England are again returned into circulation in payment of the Council
Bills drawn by the Secretary of State. He gets from the Exchange
Banks the gold he wants to meet his sterling liabilities while the
Exchange Banks in return get the rupees they need in India. The
Council Bills which the banks purchase from the Secretary of State
are paid by means of the rupees collected for remission to England
and to that extent there is no addition to the currency circulation.
It can therefore be said that the net addition to the currency cir-
culation caused by the encashment of Council Bills will be equal
to the total sale of Council Bills by the Secretary of State minus
the taxes on account of Home Charges collected by the Government
of India.
154 India's Balance of Indebtedness
wise taken place. The function of the movements of monetary
gold is to settle the unliquidated balances of payments in
respect of commodities (including the non-monetary gold) and
services. India's balance of trade is generally favourable to
her because of her peculiarly strong position in regard to the
TABLE XXXI
COMMODITY BALANCE OF TRADE, FOREIGN BORROWINGS, AND THE
SALE OF COUNCIL BILLS
(In lakhs of rupees)
Year
1898-99
1899-00
1900-01
1901-02
1902-03
1903-04
1904-05
1905-06
1906-07
1907-08
1908-09
1909-10
1910-11
1911-12
1912-13
Commodity
Balance of
Trade
2,700
2,291
3,486
3,575
4,534
3,854
3,283
2,762
1,176
1,732
4,220
5,067
3,596
Foreign
Borrowings
409
1,225
1,308
1,337
577
179
1,190
2,497
1,029
2,668
1,428
2,465
728
565
535
1,831
Council Bills
Sold by the
Secretary of State*
2,808
2,848
1,998
2,783
2,775
3,568
3,654
4,722
4,989
2,292
2,096
4,102
3,955
4,037
3,850
4,660
* Statistical Abstract for British India.
export trade. 1 But, especially during the period 1898 to 19131
this normal feature of Indian trade became prominent. First,
because since the beginning of the present century the foreign
demands for India's export commodities, which are mostly
raw materials and foodstuffs, increased rapidly as a result of
1 Cf. W. L. Thorp, Business Annals, p. 332.
"With the exception of the years 1856-62 and a short period since
the close of the war, Indian foreign trade has recorded a large excess
of exports over imports. "
Foreign Exchange and Gold Movements 155
.the rapid industrial development in the West. Secondly,
because India was importing large amounts of foreign capital
during the period. As both these factors were working simul-
taneously it is not possible to ascertain exactly how much
of the foreign borrowings of India were transferred to this
country in the form of Council Bills. The increased volume of
our foreign imports, along with the increase in our foreign
exports and foreign borrowings, suggests that some part of the
new capital raised abroad must have entered the country
in the form of goods, but the heavy sales of Council Bills
show that a large part of it must have come in the form of
money. The inference drawn by J. M. Keynes from an analy-
tical study of India's foreign trade during 1900 to 1908 can
be cited in support of our statement. He says: "At the earlier
stage imports, though steadily progressing in value, did not
leap forward so rapidly, with the result that a larger balance of
trade remained to be met by the sale of Council Bills. The
new wave of prosperity seems not unnaturally to have required
and attracted foreign loanable capital in a more ample stream
than during the years immediately preceding it, and this cir-
cumstance, combining with a large excess of exports over
private imports, swelled the sale of Council Bills to an unpre-
cedented extent, the influx of new capital being, on the whole,
the more important factor of the two." 1 This statement of
Keynes seems to be a little exaggerated, nevertheless, it does
indicate that the demand for Council Bills was at least partially
caused by India's foreign borrowings.
SUMMARY
The conclusions of this chapter can be summarized as follows :
First, as the two disturbing factors the increased foreign
demand for India's exportable commodities and her foreign
1 J. M. Keynes, "Recent Economic Events in India/' 19. Economic
Journal, 1909.
156 India's Balance of Indebtedness
borrowings were working simultaneously, the process of
adjustment to their individual influence could not be traced
separately.
Secondly, adjustment to both these disturbing factors was
brought about in the same way. The rupee-sterling exchange
was favourable to India during the major part of the period
under consideration, and the sale of Council Bills, which played
the part of gold movements in India, was very large through-
out the period, except on one or two occasions.
Thirdly, in keeping the rupee-sterling exchange favourable
to India and in creating a large demand for Council Bills to
settle her balance of payments, foreign borrowings had some
influence along with the increased commodity exports.
CHAPTER VII
CHANGES IN RELATIVE PRICE-LEVELS AND THE
ADJUSTMENT OF THE BALANCE OF PAYMENT
IN gold-standard countries the readjustment of the balance
of payments disturbed by more or less permanent factors like
an increase in the foreign demand for exports or in the amount
of foreign borrowings is brought about by means of gold move-
ments and changes in relative price-levels, which in their turn
influence the commodity balance of trade. The importation
of gold under the gold standard involves a change in the in-
comes "spendable" by the people of the countries concerned.
For example, if the people of A borrow an additional X million
rupees from the people of B,the former have X million more
to spend and the latter X millionjess. Having more to spend
altogether, the demand of the people in A for foreign goods
as well as for the goods produced in their own country increases,
while the reverse happens in B where people have now less
to spend. The increase in the effective demand of A for goods
in general, foreign and domestic, raises its price-level, while,
on the other hand, the fall in the effective demand of B lowers
its price-level. 1 If the volume of foreign borrowings of A
remains constant for a long period, the relative changes in
the "spendable incomes" and consequently in the price-
levels in the borrowing and the lending countries bring about
an excess of commodity imports into A from B equal to the
amount of A's foreign borrowings, and further gold move-
ments from B to A are stopped. The favourable balance of
payments caused by the increase in foreign borrowings is in
the beginning settled by an inflow of gold, but ultimately by
a change in the commodity balance of trade. Similar will
be the case if the favourable balance of payments is caused by
1 Barrett Whale, International Trade, p. 78.
158 India's Balance of Indebtedness
an increase in the foreign demand for A's exportable com-
modities. 1
Under the gold-exchange standard as it prevailed in India
during the pre-war period, the immediate settlement of her
large favourable balances of payment caused by both the
factors mentioned above working simultaneously, was brought
about mainly by the sale of Council Bills. In the transmission
of "spendable income" to India these bills played the same
part which gold imports would have played had India been
on the gold standard. Naturally, we should, expect an increase
in the spendable income of India due to her increased foreign
borrowings and the increasing foreign demand for her export-
able commodities during the period of our study to force
up the price-level. At the same time, because India's capital
imports during the period under consideration were almost
wholly from the United Kingdom, we should expect the
prices there to display a falling tendency. However, it is note-
worthy in this connection that there was a world-wide rise in
prices between 1897 and 1914, due to a general business
prosperity, which was only punctuated by the crisis of 1907. 2
Therefore, what we should expect (according to the theory of
1 The process of readjustment is similar in the two cases. But
the final results are not the same. In the case of foreign borrowings
as well as of increased demand for exports, the preliminary gap
between "incomes'* and payments is ultimately restored by an
expansion of imports. But in the case of foreign borrowings the margin
may be filled up in part by a contraction of exports, which is, of
course, by hypothesis impossible in the other case. Again, in the case
of foreign borrowings the commodity balance of trade is never
restored, but this happens in the case of increased demand for exports.
3 W. C. Mitchell, Business Cycles, p. 78. Also compare W. T.
Layton, An Introduction to the Study of Prices, p. 83. "The features
of the price curve since the last upward movement began are the
booms of 1900 and 1907 with a considerable depression in the
intervening years, and since 1907 a drop with a further rise to the
highest point in 1913. Thus there are two fairly long cycles and a
short one which has probably not yet reached its climax. But whether
one looks to the maximum points or to the bottom points of these
three cycles, there is shown an equally steady upward movement."
Changes in Relative Price-Levels 159
relative price-levels as a factor in the mechanism of adjust-
ment) is not a rise of prices in India and a fall of prices in
Great Britain, but a relatively greater rise in India than in
Great Britain.
INDEX NUMBERS OF INDIAN PRICES
An index number of prices is a measure of the composite
effect of the numerous forces which cause prices of individual
commodities to rise or fall. There are four Index Numbers of
wholesale prices in India available for the period of our study :
(i) Atkinson's Index Number.
(ii) The Official Index Number prepared by the Depart-
ment of Statistics, Government of India,
(iii) The Indices prepared by the Prices Enquiry Committee.
Atkinson's Index Number is calculated from in prices of
48 commodities; 60 prices representing articles of food, 29
prices representing raw materials, n prices representing
manufactures, and n prices representing imported articles. 1
The weights are assigned according to the production and
imports of the selected articles during the year 1893. The
Index Number was published by its author in the Jourral of
the Royal Statistical Society, September 1909, and has since
then been compiled by the Department of Statistics on the
same lines. The main criticism of Atkinson's Index Number
is that it does not use variable weights. However, as a rough
indication of the trend of prices in India during the pre-war
years of the twentieth century, it may be accepted as more
reliable than any other unweighted Index Number.
The Official Index Number is compiled from the price
quotations of 39 staple commodities, n imported and 28
exported, and the base year selected in 1873. The articles are
1 F. J. Atkinson, "Rupee Prices in India, 1870 tojpoS," 72. Journal
of the Royal Statistical Society , p. 497.
160 India's Balance of Indebtedness
selected according to their domestic importance rather than
their prominence in the foreign trade of India. The "articles
of export' ' include 9 foodstuffs, 15 raw materials, and 4 manu-
factured articles. The greatest drawback of this Index Number
is that it assigns equal weights to all the commodities it includes.
The Prices Enquiry Committee has selected "as many as
possible of the main staple articles of Indian production and *
consumption" for the preparation of their Index Numbers.
In all, the number of articles with their varieties counted
separately comes up to 140. They have been classified as
(i) cereals; (ii) pulses; peas or split peas; (iii) sugars; (iv) tea
and coffee; (v) other articles of food, (a) condiments and
spices, (b) animals and animal produce, (c) others; (vi) oil
seeds, oils and oil cakes; (vii) textile jute; (viii) textile cotton;
(ix) other textiles ; (x) hides and skins ; (xi) metals ; (xii) other
raw and manufactured articles; (xiii) building materials. 1
The Committee prepared two Indices, one Weighted and the
other Unweighted, with the quinquennium 1890-4 as the
base period. The weights assigned to the commodities in the
Weighted Index Number are calculated for every quinquennium
since 1890.
In general, statisticians support the use of Weighted in
preference to Unweighted Index Numbers as measures of the
general trend of prices, if the weights used are not wholly
arbitrary but related even though very roughly to the relative
importance of the commodities included in the Index.*
Accordingly, Atkinson's Index and the Weighted Index of
the Prices Enquiry Committee are preferable to the Official
Index and the Unweighted Index of the Prices Enquiry Com-
mittee. Again, between these two a choice has to be made.
The weights of Atkinson's Index Number are based on the
importance of the commodities selected by him, in a par-
1 Report on the Enquiry into the Rise of Prices in India, vol. i, p. 71.
* J. Viner, Canada's Balance of International Indebtedness, 1900-13,
p. 224.
Changes in Relative Price-Levels 161
ticular year, viz. 1893. Under the rapidly changing conditions
of production and trade which characterized the pre-war
period of the gold-exchange standard in India the importance
and, consequently, the weights of her different staple com-
modities cannot be expected to remain unaltered over a long
period. In fact, the weights of commodities like rice, sugar,
indigo, and coal did change considerably during the period
1893 to 191 3. x Hence, the Weighted Index Number of the
Prices Enquiry Committee which uses varying weights would
be more satisfactory than Atkinson's Index Number which
uses constant weights. For the sake of this study we shall,
therefore, use Atkinson's Index Number and the Weighted
Irfdex Number of the Prices Enquiry Committee, but pre-
dominantly the latter in preference to all the other Indices of
wholesale prices in India.
INDEX NUMBERS OF WHOLESALE PRiCES IN THE UNITED KINGDOM
For the United Kingdom the Official Index Number of the
Labour Department, Board of Trade, and Sauerbeck's Index
Number would be used. Here, however, it is necessary to
bear in mind that both these indices as well as the Index
Number of the Economist are constructed mainly from the
price quotations of raw materials and foodstuffs which are
largely import commodities in that country. 2 In a creditor
country during a period of increasing foreign lending, such as
was the period 1898-99 to 1913-14 for the United Kingdom,
import prices should rise relatively to domestic and export
prices.3 Moreover, after 1900 the rise in prices all over the
1 C. N. Vakil and Muranjan, Currency and Prices in India, pp. 306,
307-
1 Cf. A. W. Flux, "Measurement of Price Changes," 74. Journal
of the Royal Statistical Society, p. 169. "Of the 47 price series used
in constructing the British Board of Trade Price Index 35 are not
only for import commodities but are the average import values."
3 C. K. Hobson, The Export of Capital, p. 219.
L
India* $ Balance of Indebtedness
DATA OF CHART I
INDICES OF WHOLESALE PRICES FOR INDIA AND UNITED KINGDOM
India
Atkinson's
Year Index*
India
Prices
Enquiry
Committee]
United
Kingdom
Labour
Department
Board of
Trade.l
United
Kingdom
Sauerbeck.^
1898-99
100
IOO
IOO
IOO
1899-00
97
100
99
106
1900-01
114
112
108
117
1901-02
in
no
104
no
1902-03
102
1 06
104
109
1903-04
99
105
1 08
109
1904-05
96
1 06
1 06
no
1905-06
108
U3
1 06
H3
1906-07
127
128
109
I2O
1907-08
134
133
114
126
1908-09
143
132
in
114
1909-10
129
122
112
116
1910-11
1 20
124
117
123
1911-12
"5
125
117
126
1912-13
139
132
124
133
I9I3-H
146
140
126
133
* F. J. Atkinson's Index Number of Indian prices in prices of
48 commodities, weighted (60 articles of food, 19 raw materials, 11
manufactured articles, and 11 imported articles) adjusted to 1898-99
= 100.
t Prices Enquiry Committee 102 articles, weighted, adjusted to
1898-99 = loo.
J United Kingdom Labour Department, Board of Trade 47
articles, chiefly raw materials and foodstuffs, weighted adjusted to
1898-99 = loo.
United Kingdom, Sauerbeck Unweighted Index of 32 commodi-
ties, chiefly raw materials and foodstuffs adjusted to 1898-99 = 100.
Changes in Relative Price-Levels
163
CHART I
INDICES OF WHOLESALE PRICES IN INDIA AND UNITED KINGDOM
164 Indicts Balance of Indebtedness
world was more marked in the case of raw materials and food-
stuffs than in the case of manufactured articles. 1 The price
indices that we shall use are, therefore, likely to exaggerate the
rise in British prices.
Chart I represents a comparison between the courses of
wholesale prices in India and in the United Kingdom.
Even if no allowance is made for the exaggeration of the
upward trend by the British price indices, the Index of the
Prices Enquiry Committee shows an upward tendency rela-
tively to the Official Index Number of British prices, except
for the solitary year 1903-4. So also the Indian Index as
compared with Sauerbeck's Index Number for the United
Kingdom reveals the relatively higher level of Indian prices,
except in the years 1899 to 1901 and 1902 to 1904. Therefore,
if we could make allowance for the defect of the British price
indices, Indian prices would have been still higher than
British prices throughout the period of our study. How far the
relatively greater rise in Indian prices was due to the import
of foreign capital, and how far to the increased foreign demand
for India's exportable commodities, it is not possible to decide
quantitatively. At the same time it cannot be controverted that
the import of foreign capital was one of the factors responsible
for adding to India's "spendable income" and, consequently,
for raising her price-level. Almost the whole of the existing
literature on Indian currency and prices seems to have dis-
regarded this factor in attributing the rise of Indian prices
solely to the currency policy of the Government. Similarly,
writers who have attributed the rise of prices wholly to in-
1 WORLD RISE IN PRICES
Raw Manufactured
Year Foods Materials Articles
1900 loo 100 loo
1912 134 136 117
1913 126 130 118
R. H. Coats, Canadian Cost of Living, Report, vol. ii, p. 247.
Quoted by J. Viner, op. cit., p. 221.
Changes in Relative Price- Levels 165
creased foreign demand for India's export commodities, are
open to the same criticism, though in a lesser degree. Mr. J.
M. Keynes only has put forward the theory that "apart from
the fluctuations of f e seasons, the Indian level of prices is
most influenced at the present time (that is 1900-9) by the
extent to which Europe makes her investments there/' 1 He
is understood to have later modified his position to some
extent, but still believed that the influence of foreign invest-
ments in India on her price-level was appreciable. 2
SECTIONAL PRICE-LEVELS
The movement of relative price-levels in the borrowing and the
lending countries bring about the adjustment of the balances
of payment through their effect on the commodity balance of
trade. A rising price-level in the borrowing country encourages
imports and discourages exports so that the balance of pay-
ments due to it is ultimately settled by an excess of commodity
imports over exports equal to the volume of its annual foreign
borrowings. The method of operation of price changes in the
adjustment of the balances of payment can, however, be more
clearly understood by comparing the different trends of the
sectional price-levels. In passing, however, it need be said
that the volume of India's foreign trade is less than 10 per
cent of the volume of her domestic trade. Besides, the vast
extent of the country, its enormous and immobile population,
the sluggish character of its entire economic life make it
possible for marked changes to take place in international
transactions with much retarded effects on domestic trade.
Through long periods foreign exchange, imports and exports,
and the prices of imported and exported goods, could vary
as if they were quite in a realm of their own, separated by a
1 J. M. Keynes, "Recent Economic Events in India," Economic
Journal^ 1909, p. 67.
* Report on the Enquiry into the Rise of Prices in India, vol. i, p. 96.
1 66 India's Balance of Indebtedness
wide gulf from the prices of Indian domestic goods and from
the money incomes of the great mass of people. "Our ascetic
ideals and our not very high standard of living prevent the
adjustment of our balances by the increase of commodity
imports. " x The sectional price-levels, therefore, cannot be
expected to offer any completely reliable proof or disproof of
the theory relating to the adjustment of the balances of payment.
. Theoretically, the increase in the spendable income of the
people in India will cause a rise in the prices of commodities
produced for the internal market and of services. The prices
of imported commodities will not be appreciably affected by
changes in Indian conditions, since they are largely governed
by conditions in the producing countries. If anything, the
prices of articles imported from the capital-lending country
would show a downward tendency. The relative rise in the
prices of domestic commodities will not only make imported
commodities which are different in kind from the domestic
commodities more attractive to the Indian purchaser, but
may even lead to a substitution by consumers of imported
commodities for domestic commodities of the same class, thus
shifting these commodities from the domestic to the import
class. 2 Other things being equal, there will also be a decrease
in Indian exports. The prices of exportable commodities,
except in the few cases where a great proportion of the world's
supply is contributed by India, are mainly determined by the
"ruling markets" in the consuming countries, ultimately by
world- wide relations between supply and demand. The rise
in the prices of domestic commodities and services in India
will raise the money-cost of production of the export com-
modities. If the producers succeed in raising the prices of their
commodities in sympathy with the increased cost of pro-
duction, it will lead to a diminution of exports and even to the
cessation of exports and the shift of the commodities from the
1 J. C. Coyajee, Indian Currency System, 1835-1925, p. 166.
* J. Viner, op. cit., p. 228.
Changes in Relative Price-Levels 167
export to the domestic class. If the producers do not succeed
in raising the prices of their commodities pan passu with the
increased cost of production, they would turn to other activities,
and in the extreme case the commodities may even shift from
the export to the import class. If production in India does
not keep pace with the increase in purchasing power a greater
proportion of the domestic supply will be consumed in India
and thus there will be a reduction in the "surplus" available
for export. The ultimate result of all these price changes will
be the creation of an unfavourable commodity balance of
trade or, what will be more true in the case of India, a reduction
in her normal favourable balance by an amount equal to the
volume of her annual foreign borrowings.
DOMESTIC, IMPORT, AND EXPORT PRICES IN INDIA
Domestic commodities are commodities which do not enter
in significant amounts into international trade either in the
form of imports or of exports. The number of such com-
modities is generally very large, and in all countries probably
much exceeds that of commodities having a world range of
prices. Many things, such as stone, bricks, timber, etc., because
of their great bulk in proportion to their value, are very costly
to transport over any considerable distance. Many things,
such as milk, butter, eggs, fruits, vegetables, are perishable.
"No doubt modern improvements in the transportation of
bulky goods and in the preservation of those that are perishable
tend to enlarge the sphere of foreign trade. But such things
are still sold mainly in their own region and at the prices of
their own region." 1 There are also commodities like land and
buildings which are immovable, and there are services having
limited mobility, because they cannot be separated from the
persons rendering them, the prices of which cannot therefore
be directly subject to foreign competition. The prices of all
1 F. W. Taussig, Free Trade, Tariff, and Reciprocity, pp. 73, 74.
1 68 India's Balance of Indebtedness
these commodities as well as services are determined by
domestic conditions. In India, which is a continent by itself,
the number of commodities belonging to the domestic class
DATA OF CHART II
INDICES OF DOMESTIC, IMPORT, AND EXPORT PRICES
Domestic Import Export
Prices Prices Prices
Price of 10 Articles 16 Articles
Year Labour* Weighted^ Weightedl
1898-99 100 100 100
1899-00 104 98 no
1900-01 108 113 116
1901-02 no in 114
1902-03 113 109 in
1903-04 115 112 112
1904-05 118 120 119
1905-06 123 120 118
1906-07 127 123 150
1907-08 134 132 139
1908-09 139 126 136
I9O9-IO 145 121 141
1910-11 147 130 158
1911-12 155 139 171
1912-13 157 144 181
1913-14 161 145 193
* Prices Committee Report Index Number of Wages.
t Compiled from the prices quoted by the Prices Committee Report
and by the Department of Statistics in India 10 articles (refined
sugar, kerosene, piece-goods grey, white and coloured; twist and
yarn, woollen piece-goods, raw silk, silk piece-goods, liquors) weighted
1898-99 = 100.
J Compiled from the prices quoted by the Prices Committee Report
and by the Department of Statistics in India 16 articles (rice, wheat,
tea, coffee, linseed, til seed, raw cotton, twist and yarn, raw jute and
gunny bags, raw wool, dressed skins, raw hides, opium, indigo, rape
seed) weighted 1898-99 100.
is indefinitely large. The Prices Enquiry Committee have
collected price quotations for some of these commodities,
but they have not prepared any special index to show the
trend of their prices. To prepare a weighted index of domestic
commodity prices in India is a very arduous task, and even
Changes in Relative Price- Levels 169
CHART II
INDICES OF DOMESTIC, IMPORT, AND EXPORT PRICES
170 India's Balance of Indebtedness
then it will probably not yield satisfactory results because of
the incompleteness of the data. However, since the essential
requisite of the commodities belonging to the domestic class
is their immobility between one country and another, the
prices of services which have no greater mobility than the
persons rendering them can very well be considered as an
important index of the trend of domestic prices. "The trend
of wages, if allowance be made for the probability that wages
will show considerable inflexibility during periods of fluctua-
tion in general price-levels, offers perhaps the best single
index of the trend of domestic prices in general." 1 Therefore
in the absence of a special index we shall use the index number
of wages in India prepared by the Prices Enquiry Committee
to represent the trend of domestic prices. It includes industrial
wages and the wages of skilled labourers, unskilled labourers,
and domestic servants in urban areas and cities.
To examine the course of import and export prices we have
prepared weighted index numbers from the declared whole-
sale prices of important commodities. The weights assigned
are based on the importance of the commodities according
to value in the import and export trade of India every year
during the period of our study.
The course of domestic, import, and export prices in India
during 1898 to 1913 is represented in Chart II.
Chart II indicates a general upward trend of all the sectional
price-levels. This was due, as already explained, to the world-
wide business prosperity that characterized the pre-war
period of the present century. But among the prices repre-
sented in the Chart, export prices show the greatest rise and
import prices the least. The course of domestic prices is mid-
way between the two. The prices of imported articles are
determined mainly by the conditions ruling in the country
or countries which produce them. As more than 75 per cent
of our imports during the period under consideration were
1 J. Viner, op. cit., p. 247.
Changes in Relative Price- Levels 171
from Great Britain, a capital lending country, and as India
was a capital borrowing country, theory would expect the
prices of domestic commodities in India to rise relatively to
the prices of imported commodities. But the rise of export
prices over domestic prices is anomalous. The import of
capital into India is inconsistent with the tremendous rise in
the prices of Indian exports. This suggests, however, that
there was some other factor in operation whose influence out-
weighed the effect of foreign borrowings on Indian prices. In
fact, the relatively greater rise in the price of Indian exports
was due to the "immensely enhanced" demand for them
during the period under study. 1 The demand for our exports
was all the while moving up by leaps and bounds ; and that is
why the volume of our exports increased pan passu with the
increase in their prices. This fact also explains why the expecta-
tion of theory in regard to the effects of foreign borrowings on
the sectional price-levels in the borrowing country was not
fulfilled by the course of sectional prices in India during
1898 to 1913.
THE GENERALLY PREVAILING EXPLANATION OF THE RISE OF
PRICES IN INDIA
Our discussion, though directly concerned with the effect of
foreign borrowings, incidentally sheds considerable light
upon a very controversial aspect of Indian currency history
during the period of our study.
Almost all writers on Indian currency have attempted to
analyse and discover the causes of the rise of prices in India
during 1898 to 1913. It appears, however, that the primary
objective of quite a large section of these writers was to dis-
credit the gold-exchange standard system which was brought
into operation in India in 1900. The rise of prices in India
was put forward as a definite proof of their contention that
1 J. C. Coyajee, The Indian Currency System, 1835-1925, p. 169.
172 Indicts Balance of Indebtedness
the gold-exchange standard system was less automatic in its
functioning than the gold-standard system, that it left to the
Government, which managed the currency organization, a
large scope for currency manipulation, and that while it
provided plenty of openings for the volume of currency in
circulation in the country to expand, there were no methods by
which the currency circulation could be contracted auto-
matically. In short, it was maintained that the inflation of
currency, the immediate cause of the rise of prices was made
possible by the new monetary system, and that it would have
been impossible had there been a gold standard and a gold
currency instead of a gold-exchange standard with token
rupees in circulation. 1 As Professor Nicholson, the foremost
critic of the gold-exchange standard system in India, puts it:
"In the case of gold, there are natural economic forces which
in time must limit the monetary supply and so far the level of
prices.** Thus the problem of Indian prices during the pure
gold-exchange standard period has been assumed by these
writers to be essentially connected with the particular type of
monetary organization adopted by the country. Foreign
borrowings and the increased volume of our exports during
the period of our study have not been given any consideration
whatsoever as factors affecting currency circulation in India
and consequently the prices. 2
1 C. N. Vakil and Muranjan, Currency and Prices in India, p. 326.
"As pointed out already the medium of circulation had now come
to depend upon the will of the administrators of the country. It is
the acts or the policy of those who govern this country that has
determined the course of prices in India ever since 1893."
8 In their hurry to criticize the Government for what they believe
to be the mismanagement of currency without taking into considera-
tion all the relevant factors, writers in India have a good parallel
in Argentina. The following passage from a study of Argentine
International Trade Under Inconvertible Paper Money, 1880-1900,
by J. H. Williams, bears out this statement:
"It has been a fairly common remark among Argentine writers
on economic problems that the vicissitudes of Argentine paper money
history have had nothing to do with borrowing operations, or with
Changes in Relative Price- Levels 173
To substantiate their contention that the rise of prices in
India was due to the gold-exchange standard and its mani-
pulation by the Government, writers on Indian currency
compare the movement of price-levels in India with those of
price-levels in Great Britain. 1 But the fact that Indian prices
rose relatively to British prices during the period, while it
suggests that the divergence may be due to differences in the
currency systems does not at all prove it. Had it not been for
their preoccupation with the alleged defects of the Indian
currency organization, these writers would have looked for
less plausible but more reasonable explanations of the diver-
gence. During the period of our study, i.e. 1898 to 1913,
India was a capital-importing country, while Great Britain
was a capital-exporting country. This difference in the inter-
national position of the two countries was itself sufficient to
bring about a divergence between the movements of their
price-levels. 2 Therefore, this divergence between the prices
the balance of international payments. When in 1890 the gold premium
was shooting up by leaps and bounds, the Paris correspondent of
La Nation reported to his paper an interview with various European
bankers in which the bankers took the view that the crisis, and the
premium on gold, was fundamentally due to the inability of Argentina
to meet its enormous liabilities of interest owed abroad; the cor-
respondent added the characteristic sentence: 'In Argentina, on the
contrary, every one knows that the crisis is due to bad government,
to bad political and financial administration, and to excessive issues
of paper money.' "
1 B. R. Ambedkar, The Problem of the Rupee, pp. 199-200.
* J. Viner, Canada* s Balance of International Indebtedness, 1900-15,
p. 218.
"The countries grouped in ascending order according to the
degree of buoyancy which their prices showed are as follows : (i) Great
Britain, France, Italy, Belgium, Holland, and Norway; (ii) Germany,
Austria, Russia; (iii) India, Australia, New Zealand; (iv) Japan,
Hungary, the United States, and Canada. Although it is not to be
contended that the international movement of capital is the sole
factor determining the trend of price- levels in different countries,
it is significant that in general the capital-lending countries experienced
the least rise in prices and the capital- borrowing countries the
greatest rise."
174 India's Balance of Indebtedness
ruling in India and Great Britain cannot be attributed to the
different currency systems of these countries. It was essentially
due to their relations in the international capital market and
hence cannot be invoked to prove the merits or demerits of a
particular system of currency. The trend of prices in Canada
and the United States of America lends support to this con-
tention. For both of these countries were on a gold-standard
.basis and yet the divergence between their price-levels and the
price-level in Great Britain during 1898 to 1913 was the
greatest. Here, again, the explanation is to be found in the
different relations of these countries in the international
capital market Canada and the United States of America
were borrowing heavily from Great Britain. Whatever the
system of currency obtaining in a country an import of foreign
capital is bound to raise its price-level.
Another explanation of the rise of prices in India during
the pre-war period, without reference to the particular currency
system which existed in the country, is put forward by Sir J.
C. Coyajee. He maintains: "Whatever might be the currency
system of a country, large gains from international trade make
a country of higher level of incomes, and under certain cir-
cumstances (e.g. inefficiency of labour in certain directions or
prevalence of diminishing returns) of high prices. These
factors would be sure to affect prices even under a gold-cur-
rency system, especially in an undeveloped country like India,
producing mainly raw materials of industry which are subject
to the law of diminishing returns." 1 As we already know,
due to the general business prosperity of the world and the
industrial expansion of a great many countries, the demand for
India's export commodities mainly raw materials was fast
increasing. This increased demand for the export commodities
raised their prices, and the rising tendency of prices which
reflects the increasing intensity of foreign demand was kept
till the outbreak of the war. Naturally the gains of India were
1 J. C. Coyajee, The Indian Currency System, 1833-1923, p. 160.
Changes in Relative Price-Levels 175
very large. First, the volume of her exports was increasing and,
secondly, her export commodities were being sold at an
increasing level of prices. The large favourable balances of
trade which were the direct result of this advantageous position
of India in the international market were liquidated by the
sale of Council Bills. On presentation to the Treasury these
bills were cashed in rupees which constituted additions to the
volume of currency circulation in the country. 1 Since additions
to the currency circulation in India during the period of the
gold-exchange standard were made chiefly by means of Council
Bills, writers on Indian currency who maintain that there was
inflation of currency attributed the phenomenon to the un-
usually large sale of Council Bills by the Secretary of State.
But the sale of Council Bills was only the mechanism by
which the impact of outside international forces was being
transmitted to the various parts of the internal economy in
India, chiefly to the price organization. The demand for
Council Bills was really a demand for purchasing power in
India, which was created not By the management of her parti-
cular currency system, but by her foreign borrowings, and
still more, by the increasing international demand for her
exports. So long as these factors were active, their influence
would have been felt upon the Indian price-level, irrespective
of the monetary organization obtaining in the country. And
if this is a rational and sufficient explanation of the pheno-
menon under discussion, surely to establish the statistical
fact that Indian prices rose more than the British during the
pre-war years of this century, does not at all prove the point
that the greater rise of the Indian prices was in any way due
to the peculiarity of the Indian currency organization.
It is evident, then, that the true causal sequence ran during
the period from the growing and intense demand for a number
of Indian products supplemented by foreign borrowings,
1 For an explanation of the net addition to the currency circulation
effected by means of Council Bills, see footnote on p. 153.
176 India's Balance of Indebtedness
through an increase of currency, to the general rise of prices in
India. The rise of prices in India was due to her foreign borrow-
ings and to the foreign demand for her export commodities;
and it was able to sustain itself over a long period, because the
foreign demand for India's export products was becoming
more and more intense. The main factor in the situation the
advantageous position which India occupied in her foreign
trade was steadily becoming more conspicuous, through
more than a decade of the world's commercial and industrial
prosperity,
SUMMARY
The results of the analysis of relative price-levels undertaken
in this chapter may be presented as follows :
(i) First, as a result of the increased purchasing power in
India due to her foreign borrowings and her advantageous
position in foreign trade, there was a rise in the general price-
level. At the same time as a result of the diminished purchasing
power in Great Britain the capital-lending country during
the period of our study the rise in her general price-level
was relatively less.
(ii) Secondly, the sectional price-levels in India during this
period also showed a general upward tendency. Export prices
mounted very high, followed by domestic prices and import
prices in the order of their buoyancy.
(iii) Finally, export prices displayed the greatest rise because
of the increasing foreign demand for India's export com-
modities during the period, which more than outweighed the
influence of foreign borrowings in the opposite direction.
CHAPTER VIII
ADJUSTMENT OF THE BALANCE OF PAYMENT
AND THE BARTER TERMS OF TRADE
COMMODITY BALANCE OF TRADE
IN bringing about the final adjustment of international balances
of indebtedness to more or less permanent disturbances the
commodity balance of trade is by far the most important
single factor. Specie imports and exports, as items in the
commodity balance of trade, are only a preliminary phase
in the adjustment. "They exert their main influence, not
through the effect on the balance of payments of their own
values as debits and credits, but by their influence on price-
levels and through them on the remaining items in the com-
modity balance of trade/ 11 *
So far as invisible items in the balance of payment are
concerned changes in price-levels have no appreciable influence
on them. International transactions in services are very little
affected by them. Tourists' expenditure and insurance trans-
actions also do not show any influence of the changes in
exchange rates and prices. The amount of freight charges
payable abroad or receivable from abroad by a given country
is directly determined by the volume of its foreign trade, by
the proportion in which that trade is carried on by foreign or
national shipping companies and by the amount of trans-
portation business done for other countries as well as by freight
rates. When factors like continued foreign borrowing from
abroad, or increased foreign demand for its export com-
modities disturb a country's international balance of indebted-
ness, they affect its balance of freight payments mainly through
1 J. Viner, op. cit, p. 256.
M
178 India's Balance of Indebtedness
their influence on the volume of commodity transactions,
although they may influence the extent to which that country's
capital and labour is engaged in the carrying business. Interest
payments are determined simply by the amount of capital
borrowings, the rates of interest agreed upon and the extent
to which debtors respect their contractual obligations.
Non-commercial transactions like immigrants' and emi-
grants' remittances and the movements into and out of a
country of migrants' personal effects, because of their non-
commercial character are wholly free from the influence,
direct or indirect, of any factors disturbing the international
balance of payments. Only the capital brought in by immi-
grants is a possible exception. For an increase in foreign
borrowings or in the foreign demand for export commodities
brings about in the borrowing country a situation favourable
to an inflow of foreign labour. 1
It follows from this that when a disturbing factor of sufficient
importance and long- continued duration, such as Indian
borrowings abroad during 1898 to 1913, upsets the even balance
between her debit and credit international obligations, an even
balance of payments is restored and maintained in spite of the
debit balance of indebtedness mainly through compensatory
variations in the commodity balance of trade. Specie move-
ments and transfers of securities and bank deposits are im-
portant in the final adjustment of the balance only when the
disturbances to the even balance of payments are casual and
temporary. Transfers of securities and bank desposits do not
play an important part in the adjustment of the balance of
payments to a continued debit or credit balance of indebted-
ness, since they themselves are merely representative of some
1 A. C. Whitaker, "The Ricardian Theory of Gold Movements,"
1 8. Quarterly Journal of Economics, 1904, p. 231.
"The investment of capital abroad, the travel of tourists, and all
the other factors outside of the balance of trade itself are the com-
paratively independent variables, the balance of trade in goods is
the compensatory variable in the balance sheet of total indebtedness* 1 '
Adjustment of the Balance of Payment 179
of the items in the balance of indebtedness to which adjustment
must be made.
The shift in the commodity balance of trade necessary to
bring about the adjustment of the balance of indebtedness to
foreign borrowings is caused, as explained in the preceding
chapter, by the influence of changed money incomes and
prices on commodity imports and exports. In the borrowing
country the money incomes and prices rise, while in the
lending country they fall. In the borrowing country the prices
of imported articles tend to go down, while the prices of
domestic and exported articles tend to rise. The falling prices
of the imported articles and the rising money incomes en-
courage imports, while the rising prices of the exported com-
modities discourage exports. This process, provided the annual
amount of foreign borrowings remains constant, brings about
an unfavourable commodity balance of trade or a reduction in
the normal favourable balance of trade equal to that amount.
Thus ultimately foreign capital enters the borrowing country
in the form of commodities. We have already seen that changes
in the sectional price-levels of India as a result of her foreign
borrowings would have been as predicted by theory but for
the simultaneous influence of another factor, viz. increased
foreign demand for India's export commodities. Now, let us
see how far the commodity imports and exports of India
were affected by changes in her sectional price-levels, and
how far the adjustment of the balance of indebtedness to
foreign borrowings was brought about according to the
expectations of theory. The relevant data are presented in
Table XXXII.
In trying to find out a correlation between India's foreign
borrowings and her commodity imports and exports as given
in the following table a crucial point must not be lost sight of.
When the theory states that the ultimate adjustment of the
balance of indebtedness to foreign borrowings is brought about
by a shift in the commodity balance of trade it assumes certain
180 India's Balance of Indebtedness
things. First, it assumes that before a country begins to raise
foreign loans there exists an even balance between her credit
and debit obligations and, secondly, that the foreign borrow-
ings continue for a long period at an even rate. In the case of
India during the period of our study the second of these
assumptions did not hold good. Both the direct as well as the
TABLE XXXII
COMMODITY IMPORTS AND EXPORTS, FOREIGN BORROWINGS AND THE
SALE OF COUNCIL BILLS
(In lakhs of rupees)
Council Bills
Sold by the
Commodity
Commodity
Foreign
Secretary
Year
Imports
Exports
Borrowings
of State
1898-99
8,465
12,021
409
2,808
1899-00
9,004
11,704
1,225
2,848
1900-01
9,902
12,193
1,308
1,998
1901-02
10,150
13,636
1,337
2,783
1902-03
10,318
13,893
577
2,775
1903-04
12,311
16,845
179
3,568
1904-05
13,571
17,425
1,190
3,654
1905-06
14,447
17,730
2,497
4,722
1906-07
15,512
18,274
1,029
4,989
1907-08
17,088
18,264
2,668
2,292
1908-09
I4>2I3
15,945
1,428
2,096
1909-10
15,217
19,437
2,465
4,102
1910-11
16,567
21,708
728
3,955
1911-12
18,768
23,835
565
4,037
1912-13
2i,54i
25,685
535
3,850
1913-14
22,013
25,609
1,831
4,660
indirect estimates of India's foreign borrowings clearly show
that their annual flow was subject to large variations.
Bearing in mind this divergence between the conditions
assumed by theory and those existing in India, if we scan the
course of India's commodity imports, we find that they were
increasing every year during 1898-99 to 1913-14 except in
1908-9. It is not possible to find out how much of the increase
in imports was due to foreign borrowings and to the unusual
Adjustment of the Balance of Payment 181
prosperity of our exporters, separately, but it can be safely
assumed that it was in part at least the result of India's capital
imports during the period. This much for the part played
by the relatively low prices of imported articles and the in-
creasing spendable income of the people in India. However,
the adjustment of the balance of indebtedness to foreign
borrowings according to theory is brought about not only by
an increase in imports but also by a decrease in exports.
Naturally, therefore, simultaneously with the increase in
India's imports, we should expect a decrease in her exports,
if the mechanism of adjustment in India is to serve as a
verification of deductive theory. But the figures of commodity
exports from India reveal an entirely different state of affairs.
Simultaneously with the increase in commodity imports, there
was a much larger increase in commodity exports and this
in spite of the fact that the export prices in India during
1898 to 1913 displayed the greatest rise. If foreign borrowings
were the only factor disturbing the even balance between
India's credit and debit obligations then we should have
expected a reduction in the total value of Indian exports. That
this did not happen, but that there was on the contrary an
increase in Indian exports, suggests that some other powerful
factor was in operation, tending all the time to over-balance
the effect of foreign borrowings. This factor, as we have seen
in the previous chapter, was an increasing demand for Indian
exports. Had it not been for the intervention of this factor, the
rising prices of export commodities due to the increased
spendable income in India consequent upon her foreign
borrowings might be expected to have reduced her com-
modity exports. As it was, the adjustment of India's balance of
payments to the inflow of foreign funds was effected largely,
possibly wholly, by an increase in her imports.
We, therefore, conclude that the process of adjustment of
India's balance of indebtedness to her foreign borrowings
was to a great extent obscured by the increasing demand for
1 82 Indians Balance of Indebtedness
her export commodities which set in at the beginning of the
present century and continued till the outbreak of the war. In
the absence of this factor, the adjustment of India's balance
of trade to her varying foreign borrowings would have been
brought about under the Gold Exchange Standard, subject
to the peculiar conditions of Indian economic life, in exactly
the same manner as it is effected under the pure Gold Standard.
FOREIGN BORROWINGS AND THE TERMS OF INTERNATIONAL
EXCHANGE
According to Mill, during a period of foreign borrowings
prices rise in the borrowing country and fall in the lending
country. It is a corollary of this reasoning that during a period
of foreign borrowings the terms of international exchange, or
to use Professor Taussig's expression, "the barter terms of
trade," 1 should move in favour of the borrowing country and
against the lending country in other words, that the borrowing
country obtains more of imported goods in exchange for each
unit of its exports than it did before the foreign borrowings
set in. This shift in the barter terms of trade which represents
a shift in the reciprocal demand of borrowing and lending
countries for each other's products is essential to the adjust-
ment of the balance of indebtedness to foreign borrowings,
both under barter and money exchange. However, under
barter, the transfer of loans to the borrowing country in the
form of goods comes first and is the cause and not the effect
of the shift in the terms of international exchange. The shift
in the terms of international exchange serves to restore equili-
brium in the trade in those commodities which are not directly
connected with foreign borrowings. Under money exchange
the shift in the barter terms of trade is the condition precedent
1 Professor A. C. Pigou expresses this quantitative relation between
commodity imports and exports by the phrase "real rates of inter-
national interchange."
Adjustment of the Balance of Payment 183
to the coming in of foreign borrowings in the form of goods.
An increased foreign demand for the export commodities
of a country has a similar influence on its barter terms of trade
as foreign borrowings. In the case of India, therefore, where
both the factors were operating simultaneously during the
period of our study, we should expect the barter terms of trade
to move to her advantage.
THE BARTER TERMS OF TRADE
There are two ways of looking at the barter terms of trade.
One may be indicated by the phrase "net barter terms of
trade"; the other by the "gross barter terms of trade." The
first takes into consideration those goods only which pay for
goods, while the second regards the whole volume of goods,
both imports and exports. 1 The net barter terms are those
of the exchange of domestic goods for foreign goods in the
simplest case, where the international trade is concerned only
with the purchase and sale of merchandise. In modern times
the international trade of a country includes, besides mer-
chandise transactions, a large volume of non-merchandise
transactions. Therefore, the net barter terms of trade have
now become a purely theoretical concept. The actual inter-
national trade of any modern country can be separated into
two parts: first, the exchange of exported goods for an equal
money value of imported goods ; second, an excess in money
value of imported goods over the exported goods or vice versa,
representing the balance of non-merchandise transactions.
This distinction is theoretical only. What actually happens is
that one "unsegregated mass" of physical goods flows into
the country as imports and another mass flows out as exports.
A country having a credit balance of payments on "invisible"
account receives a larger money value of imports than that of
1 F. W. Taussig, International Trade, p. 113.
184 Indicts Balance of Indebtedness
its exports, and a country in the reverse position pays out a
larger money value of exports than that of her imports. The
physical volume of the imported goods as compared with the
physical volume of the exported goods will be greater for the
country having an excess of imports in money value and
smaller for the country having an excess of exports. This rela-
tion between the whole of a country's physical imports and
exports which we encounter in fact constitutes the "gross
barter terms of trade. "
THE MEASUREMENT OF THE BARTER TERMS OF TRADE
The barter terms of trade must always be advantageous to all
the countries having trade relations because the terms must
lie within the limits fixed by the comparative costs of pro-
duction. Otherwise the countries which do not get any ad-
vantage from an international exchange of goods would not
enter into international trade at all. However, the advantages
of an international exchange may not be equally shared by the
countries concerned at any time and may be shared by any
one country differently at different times. Therefore, a shift
in the "barter terms of trade" of a country to its advantage or
disadvantage means more favourable terms or less favourable
terms than before. The terms on which a country barters its
imports for its exports cannot be measured, but the modifi-
cations which may arise in these terms and which the theorists
have in mind when they say that the terms of trade generally
move in favour of the borrowing country and against the
lending country, can be measured. As Professor Taussig says:
"They only indicate in which direction the accretion of gain
from international exchange is changing; whether the gain,
whatever it be in a given year, is less or greater in that year
than in previous years or in subsequent years. It is changes
and changes alone, both in the net barter terms of trade and
in the gross barter terms, which we are able to follow/ 1 The
Adjustment of the Balance of Payment 185
barter terms of trade can be said to have moved in favour of
India if the quantity of exported goods paid in exchange for
a given quantity of imported goods shows a decrease during
the period of our study, as compared with the quantity of
exported goods paid in 1898. To put it in another way, the
barter terms of trade can be said to have moved in favour of
India if the quantity of imported goods received in exchange
for a given quantity of exported goods shows an increase
during the period as compared with the quantity of imported
goods received in 1898. On the other hand, the barter terms
of trade can be said to have moved against India if the quantity
of exported goods paid in exchange for a given quantity of
imported goods shows an increase or if the quantity of imported
goods received in exchange for a given quantity of exported
goods shows a decrease during the period, as compared with
the respective ratios prevailing in 1898.
INDIA'S NET BARTER TERMS OF TRADE
The net barter terms of trade take into account only those
goods which pay for goods. Therefore, as the foreign trade of a
country is carried on in terms of money values, the value of
goods imported and the value of goods exported in exchange
must always be equal. Thus if the imports and exports in each
single year are the same in money value, it follows that a
change in import and export prices indicates accurately a
change in physical quantity. 1 If export prices fall relatively to
import prices it means that more of exports are exchanged
for a given quantity of imports and vice versa. The relative
changes in India's net barter terms of trade can, therefore,
be ascertained by forming an index number of the ratio
between her import and export prices with the ratio of
1 A. L. Bowley, England's Foreign Trade in the Nineteenth Century \
p. 20.
1 86 India's Balance of Indebtedness
as the basis. 1 However, it need hardly be said that the sup-
position underlying this aspect of the barter terms of trade
does not conform to reality. The imports and exports of
India were never equal in money value and, hence, her net
barter terms of trade are merely a hypothetical matter.
INDIA'S GROSS BARTER TERMS OF TRADE
The gross barter terms of trade which take into account the
whole of a country's imports as compared with the whole
of its exports, represent the real terms on which that country
exchanges her export commodities. Therefore, the direction of
changes in those terms will be an accurate index as to whether
the advantage of international exchange was shifting in her
favour or against her during 1898 to 1913. To ascertain the
relative changes in India's gross barter terms of trade we
adjust the values of imports and exports every year during
the period of our study to their respective prices prevailing
in the year 1898. The new values would then represent the
values of the physical volume of goods imported and exported
as they would have been if prices had remained unchanged
since 1898. Thus prices being reduced to a common basis a
larger or smaller money value would necessarily represent a
1 The method can be more easily explained by means of an equation :
The value of goods imported X = the quantity of goods imported Y,
X the import prices, m.
The value of goods exported X 1 = the quantity of goods exported
Y 1 , X the export prices, m 1 .
The net barter terms of trade = the quantity of goods exported
Y 1
-r the quantity of goods imported = .
But since X 1 = X
Y'm' = Ym.
Y' m .
.*. = SB import prices -r export prices.
Y m l
Adjustment of the Balance of Payment 187
larger or smaller volume of physical goods. 1 The adjusted
figures of money values become measures of physical quantities.
If, therefore, we take the proportion of imports to exports
in 1898 as 100 and deduce the change in that ratio for the
other years, we shall get an accurate index of changes in
India's gross barter terms of trade. We say it once more that
here as well as in the figures regarding the net barter terms
of trade there is nothing which tells us whether the terms are
in themselves favourable for any given year. They indicate
only the direction and extent of changes.
The Index Numbers of India's "net barter terms of trade"
and "gross barter terms of trade," prepared according to the
methods explained above, are presented in Table XXXIII.
The net barter terms of trade as well as the gross barter
terms of trade as indicated by their respective index numbers
were moving to the greater and greater advantage of India
throughout the period of our study, except during one or two
years, when they seem to have moved against India. A given
physical quantity of imports was being purchased for a steadily
declining physical quantity of exports. But, though the general
trend of the barter terms of trade is favourable to India, there
were variations in them in particular years. Both these pheno-
mena, the movement of the barter terms of trade against
India in certain years and their irregular, though, on the whole,
favourable tendency during the period, are due to the inter-
mittent character of the operating influences, viz. the foreign
borrowings and the foreign demand for export commodities.
However, as the general trend of the barter terms of trade was
favourable to India, the expectations of theory in regard to
the effect of foreign borrowings and increased foreign demand
for export commodities are fully realized.
During the pre-war period of the present century not only
1 The value of a commodity is determined by its quantity and
price. If the price remains constant any change in the value of that
commodity must be due wholly to a change in the quantity.
X 88 India's Balance of Indebtedness
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Adjustment of the Balance of Payment 189
India but all countries mainly exporting raw materials were
gaining heavily because of the fall of freights and the con-
stantly growing demand for their products from industrial
countries where new industries were being rapidly established.
During the same period the barter terms of trade moved to
the disadvantage of the industrial countries. For Great Britain,
the chief industrial country of the pre-war period, the barter
terms of trade became more and more advantageous between
1880 and 1900. But after 1900 the terms of trade were moving
against her, right till the outbreak of the war. 1 As Dr. Marshall
has observed, countries in the position of India "have gained
all round: they have gained by lower cost of transport, and
they have gained by the lower cost of manufacture of com-
modities for direct use ; and that almost equally whether these
goods are manufactured by themselves or imported. For
competition compels England, Germany, and other Western
countries to give to consumers almost at once the full benefit
of any economy in manufacturing which they have obtained. "
Moreover, the countries whose gains from international
exchange displayed an upward tendency were mostly the
capital-borrowing countries, while the countries whose gains
were diminishing were mostly the capital-lending countries.
MONEY WAGES AND THE BARTER TERMS OF TRADE
The concrete way in which the inhabitants of a country obtain
the benefit of more favourable terms of trade net or gross
is that their money incomes rise while the prices of imported
commodities fall, or rise more than the prices of imports. With
the same amount of labour they can purchase more of imported
goods. Hence we should expect the increasing advantage
obtained by India during 1898 to 1913 to be associated with a
rise in money wages. The trends of the curves representing
1 F. W. Taussig, "The Changes in Great Britain's Foreign Trade
Terms after 1900." 35. Economic Journal, 1925.
190
India's Balance of Indebtedness
DATA OF CHART III
INDICES OF MONEY WAGES AND THE BARTER TERMS OF TRADB
Year
1898-99
1899-00
1900-01
1901-02
1902-03
1903-04
1904-05
1905-06
1906-07
1907-08
1908-09
1909-10
1910-11
1911-12
Index Number
of Money Wages
Index Number
of the Net
Barter Terms
of Trade
Index Number
of the Gross
Barter Terms
of Trade
IOO
IOO
IOO
104
89
82
108
97
84
no
97
94
U3
98
93
US
IOO
96
118
101
91
123
102
88
127
82
68
134
96
7*
139
93
74
145
86
76
147
82
75
155
81
73
157
80
67
161
75
61
1913-14
the money wages and the barter terms of trade net as well
as gross drawn in Chart III justify this expectation. It clearly
shows the natural inverse 1 correlation between the money
wages and the terms of trade.
Exports
1 This is because the terms of trade are calculated as =
Imports '
Adjustment of the Balance of Payment 191
CHART III
INDICES OF MONEY WAGES AND THE BARTER TERMS OF TRADE
CONCLUSION
THE main purpose of this study has been to follow the
mechanism of international adjustment under a gold-exchange
standard regime with special reference to that phase of it
which is concerned with the adjustment of trade balances. In
the light of India's foreign trade conditions during the pre-
war period of the gold-exchange standard the following con-
clusions may be offered.
If the even balance between credit and debit obligations of
a country is disturbed by an outbreak of heavy foreign
borrowings the volume of which remains constant for a long
period, the mechanism of adjustment of the balance of
indebtedness to its foreign borrowings is substantially the same,
whether the country is on a gold standard or a gold-exchange
standard. The only difference, which is more apparent than
real, is that while under a gold standard it is gold which flows
to the borrowing country and sets the mechanism of adjust-
ment in operation, under a gold-exchange standard the func-
tion is performed by "gold exchange" in the case of India
by the Council Bills. The flow of gold exchange increases the
spendable income in the borrowing country and raises its
price-level relatively to the price-level in the lending country.
In the borrowing country itself import prices tend to fall or
register the least rise, domestic prices register the greatest
rise, and export prices follow them more or less closely. As a
result of these changes in the sectional price-levels of the
borrowing country, commodity imports are stimulated and
exports restricted, so that there results an unfavourable balance
of trade equal in volume to the annual foreign borrowings.
When this stage is reached the flow of gold exchange to the
borrowing country ceases and foreign borrowings practically
enter the country in the form of commodities.
The working of this mechanism of adjustment of India's
Conclusion 193
balance of indebtedness to her foreign borrowing during the
period of our study was greatly obscured, especially in the
latter half of the period by another factor viz, increased
foreign demand for India's export commodities more power-
ful than foreign borrowings. Therefore the restrictive effect
of higher domestic prices and consequently of higher costs of
production on commodity exports, caused by the transfer of
a part of foreign borrowings to India in the form of spendable
income, was more than counter-balanced by a simultaneous
increase in the foreign demand for them. So far as the other
steps of the mechanism of adjustment are concerned, both the
factors disturbing the even balance between India's credit
and debit obligations during the period were working in the
same direction. It is not possible to single out either of these
factors and trace its effects on Indian prices and money wages
and ultimately on the commodity balance of trade. Hence,
bearing in mind the various stages in the process of adjustment
of balances of indebtedness to foreign borrowings under a
gold- standard system, we have tried to find out if the mechan-
ism was different under a gold-exchange standard system,
and wherever it was found to be different we have tried to
discover if the difference was due to the other factor operating
on India's foreign trade during the same period. The theoreti-
cal conclusions drawn from this study cannot, therefore, be
considered as clearly brought out from the Indian case. They
are essentially tentative in character.
Besides, the peculiarities of India's economic life in general
serve as a still further qualification to the conclusions offered
above. The vast extent of the country, its enormous immobile
population, the sluggish character of its entire economic life
make it possible for marked changes to take place in inter-
national transactions with much retarded effects on domestic
trade. Through long periods foreign exchange, imports and
exports, and the prices of imported and exported goods can
vary as if they were quite in a realm of their own, separated
N
194 India's Balance of Indebtedness
by a wide gulf from the prices of Indian domestic goods arid
from the money incomes of the great mass of people. Economic
adjustments take place slowly in India, but that they are
governed by the same laws and occur in the same manner as
elsewhere cannot be disproved.
APPENDIX I
PROFESSOR FINDLAY SHIRRAS'S METHOD
OF ASCERTAINING FREIGHT CHARGES
WE shall discuss here some of the methods which have been
used by previous writers in calculating the freight charges
paid by India on her foreign trade. Professor Shirras calculates
the freight charges on India's foreign trade in 1922-23. His
calculation is based upon a study of the earnings of British
shipping on different trade routes in 1913, made by the Board
of Trade. 1 According to the Board of Trade study, 9 per cent
of the total British shipping earnings in 1913 were realized
on the Indian trade route. Professor Shirras assumes that this
percentage was true for the year 1922-23 also, and estimates
that on this assumption the earnings of British shipping on
the Indian trade route in 1922-23 amounted to Rs. 15 crores
approximately. 2 This, according to Professor Shirras, is
equivalent to the sum that India paid on account of freight
charges on her foreign trade.
Professor Shirras's method is open to one fundamental
criticism. It cannot be said with any justification that the
percentage of Great Britain's freight earnings on the Indian
route to her total earnings on all routes remained constant
between 1913-14 and 1922-23, or that it was the same for the
years 1913 and 1922, in the face of the facts that:
(i) The percentage of British tonnage engaged in Indian trade
in 1922-23 was not the same as in 1913, and that
1 Board of Trade Journal, February 3, 1921.
* " India's share of the total earnings of the United Kingdom
shipping was 9 per cent [in 1913]. Taking that proportion for the
year 1922 . . . this would give us a figure of Rs. 15 crores as the
gross earnings of British shipping [from Indian trade] during the
year." G. Findlay Shirras, Proceedings of the Seventh Indian Economic
Conference^ p. 77.
196 India's Balance of Indebtedness
(ii) The relation between cargo available and the amount of
tonnage engaged changed between the two years.
To Great Britain her mercantile marine is a monopoly
concern and hence amenable to the laws of monopoly profits.
The amount of shipping tonnage and the level of freight rates
on a particular trade route are largely determined by the
condition of demand on the other trade routes which is ever
changing. Thus, if the amount of shipping tonnage and freight
rates on different trade routes are constantly fluctuating it
is very likely that the shares of Great Britain's freight earnings
on each of these routes might have considerably changed
during the period 1913 to 1922. This general observation is
still more true in the case of India. The employment of shipping
on this route seems to have become much less economical in
1922 than in 1913 and the tonnage had become greater in pro-
portion to the cargo available. 1 Hence, to suppose that 9 per
cent of the total freight earnings of Great Britain every year
are contributed by the Indian route because such was the
case in a particular year appears to be illogical and incorrect.
S. N. HAJl'S METHOD
A similar percentage method has also been used by S. N. Haji,
but only to confirm the results he obtained by other methods.
Nevertheless as a method, unless justified, it is faulty even for
corroboration. S. N. Haji takes us back to the days of Sir
Robert Giffen, who in the year 1882 calculated that approxi-
mately 10 per cent of the value of a commodity should be
assigned to freight and insurance charges. Haji accepts this
percentage to be true even for the year 1921-22 forty years
after Sir Giffen's calculation and allowing for insurance and
other charges takes 8 per cent of the value of a commodity to
represent freight charges. What is still more surprising is that
1 A. J. Sargent, Seaways of the Empire, p. 70.
Appendix I 197
he even procures a remarkable confirmation of this 8 per cent
rate from the ad valorem percentage of freight charges to
imports for the year 1921-22. It is, however, easy to discover
from the data he has presented that his corroborative ad valorem
percentage is unweighted, which makes all the difference
between confirmation and disproof. 1 The objections to using
Sir Robert Giffen's freight percentage, which had no relation
whatsoever to the conditions of trade, shipping, and freights
prevailing in the year 1921-22, seem to be stronger than they
were for the percentage used by Findlay Shirras. Since the
time of Robert Giffen vast changes had taken place in the
position of the shipping industry. Freights have been cut
down drastically, the tonnage of steamships had been greatly
augmented, and the transition from sailing vessels to steel
steamships had been almost completely effected. The efficiency
of the steam tonnage has been enormously increased in recent
years both in regard to speed and carrying capacity; indeed,
practically the whole of the British Mercantile Marine was
rebuilt during the first decade' of the twentieth century. 2
One more questionable point in the use of GifFen's per-
centage by Haji is that he has applied it to India's imports as
well as exports. It is a well-known fact that inward freight
rates and outward freight rates display large differences. Some-
times these differences are so large that the loss in inward
freights is made up by the profits on outward freights and
vice versa,3 If this statement is true, it follows that the ad
valorem percentage of freight charges to import values might
have been different from the ad valorem percentage of freight
1 S. N. Haji, Economics of Shipping, p. 324.
* Quarterly Review, July 1911, p. 53.
3 The Economist, February 18, 1899, "Commercial History and
Review of 1898":
"For some years outward and homeward freights have reflected
on each other an inverse ratio, that when the rates have been good
outwards they have declined homeward and vice versa/' Also the
same supplement for February 18, 1913.
198 India's Balance of Indebtedness
charges to export values. Moreover, as the commodities,
imported and commodities exported are different, having
different values per unit, the percentage of freight charges to
imports and exports, even if the rate per ton be the same, will
be different.
APPENDIX II
SAVINGS PER HEAD BROUGHT BY IMMIGRANTS
FROM DIFFERENT COLONIES
I
II
Ill
IV
Year
Natal
Fiji
Trinidad
Mauritius
Rs.
Rs.
Rs.
Rs.
1898-99
230
1899-00
216
1900-01
1901-02*
285
1902-03
270
30
1903-04
308
19
1904-05
300
26
1905-06
237
8
1906-07
'483
8
1907-08
285
3
1908-09
75
375
1908-10
105
375
I9io-nt
105
1911-12
1912-13!
135
315
I9i3~i4
135
360
135
* 1901-02
Reunion and Guadeloupe
Rs. 135-
t 1910-11
Surinam
. .
Rs. 840.
J 1912-13
Demerara
. .
Rs. 195.
I9I3-I4
Demerara,
Jamaica, and Surinam . .
Rs. 150.
APPENDIX III
REMITTANCES PER HEAD BY RESIDENT INDIAN
EMIGRANTS IN THE VARIOUS COLONIES
Year
Natal
Rs.
Fiji
Rs.
1903-04
20
2
1904-05
17
I
1905-06
16
2
1906-07
15
I
1907-08
15
I
1908-09
8
I
1909-10
9
I
1910-11
10
I
1911-12
9
I
1912-13
10
1913-14
IO
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INDEX
Ambedkar, 173
Atkinson, 159
Balance of international indebted-
ness, preliminary estimate, 95 ;
final estimate, 103
Balance of non-commercial trans-
actions, see Contents, Chapter
III, 101
Balance of service transactions,
see Contents, Chapter II.
Barter terms of trade, 183, 184;
measurement of, 184, 185 ; net,
185, 1 86; gross, 186
British Postal Orders, 77, 78
Canada, 33
Commodity Balance of Trade,
25, 46, 47, 1 77-i &
Council Bills, 85-87, 144-150,
152-155, 175
Coyajee, 166, 171, i74
Crammond, 97, 108, 109, 117,
119, 123
Daniels, 41
Dutta, 41, 43
Economist, 105, 107, 108, 116, 122
Exchange Banks, 58-61 ; in rela-
tion to Indian foreign trade, 144
Flux, 161
Foreign Capital investments,
statistics of, 104-106; from
Great Britain, public issues,
107; private issues, 122-127;
Edgar Crammond's estimate,
108, 109; Sir George Paish's
estimate, iio-ii3;H. F. How-
ard's estimate, 113-117; direct
and indirect estimates, 127
Foreign Exchange, see Contents
Foreign Exchange and Gold
Movements; its influence on
the adjustment of trade bal-
ances, 140-144
Foreign Money Orders, 75-77
Freight charges, method of ascer-
taining, 35-4o; of India, 40;
on foreign trade, 50, 51; on
coastal trade, 51-57
Giffen, 35, 51, 57
Gold, movements of, see Con-
tents Foreign Exchange and
Gold Movements.
Gold-Exchange Standard, 86,138,
139
Haji, 38, 53, 196, 197, 198
^Hobson, 51, 55
Hollander, 143
Home charges, 61-65, 85
Howard, 83, 93, 97, 108, 113-117,
118, 119
Imports of treasure, 32-35
India Bills, 91, 92
Indian emigrants, 68-74 ; savings
of, 70, 71; capital brought in
by, 71
Insurance charges, method of
ascertaining, 45-48; on coastal
trade, 54
Interest payments, 95-101
Jewkes, 41
Keynes, 88, 145, 149, 155, 165
Layton, 158
Lehfeldt, 97, 98, 128, 129
210
Indicts Balance of Indebtedness
Marshall, 189
Mill, 136, 182
Mitchell, 158
Muranjan, 161, 172
Nicholson, 172
Paish, 110-113, 117, 119, 123, 124
Pigou, 182
Postal articles, imported, 75, 76,
77, 78
Prices, Indian domestic, 167-171 ;
Indian import, 167-171 ; In-
dian export, 167-171
Railway annuities, 91
Remittance from India, means of,
74, 75
Sargent, 196
Settler's effects, 29, 30, 68
Shirras, 54, 55, 57, 61, 151, 195.
196
Taussig, 17, 182, 183
Telegraphic transfers, 85
Through foreign Money Orders,
78-80
Tourists' expenditure, 65, 66
United States of America, 67
Vakil, 91, 161, 172
Viner, 38, 44, 99, 131, 170, I73>
177
Wages, money, 189, 190; in rela-
tion to barter terms of trade,
189, 190
Whitaker, 178
Wholesale prices, Indian index
number of, 159-161; British
index number of, 161, 164
Williams, 172
Wood, 39, 44
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A vivid, autobiographical survey of the Indian scene since the appoint-
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The Co-operative Movement in the^Punjab
by SH. ATA ULLAH
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